1. An Experimental Analysis of Cooperation and Productivity in the Trust Game Old Title: Sorry No CODs Cary Deck University of Arkansas Thanks to the Center for Retailing Excellence

2. the Trust Game Described as a Model of Exchange by Coricelli, McCabe, and Smith (2000) First party can attempt trade or not and the second party can complete the trade or defect. Data from Cox and Deck (2005) Double Blind Experiments

3. Modeling Trade The gains from trade occur when the seller transfers the product to the buyer. Buyer is simply transferring money to seller. The trust game has the seller moving first, but in many situations it is the buyers that mover first.

4. Productive Trust Modeling Trade - Seller First If the parties do not trade, both keep their endowments  S and  B. The value to the buyer is v and the cost to the seller is c. The market price is p. For the Trust game: endowments  B =  S = 10, v= 30, c= 10 and p= 15.

5. Unproductive Trust Modeling Trade - Buyer First Gains from trade only realized if trade successful. Second mover seller gives up c to give the buyer v. (costs $1 to give $v/c > $1)

6. Does Order Matter Gains from trade realized if trade is attempted by first mover seller, but only if trade is successful when buyer moves first. Decision of second mover changes –Unproductive second mover gives up p to give the other p. (costs $1 to give $p/p = $1) –Productive second mover gives up c to give the other v. (costs $1 to give $v/c > $1) Andreoni and Vestrlund (2001) suggest greater cooperation in nonproductive trust game (buyer first game).

7. Experimental Design Trust Game Reversed Trust Game

8. Experimental Design Parameters  B =10,  S =5, v=15, c=5 and p=10. –Value and cost are half of standard trust game level (as in some of Cox and Deck 2005) –asymmetric endowments  both risk a $0 payoff from trust. –price divides surplus evenly. Double blind payoff procedures. Subjects paid $5 show-up fee before 25 minute one-shot experiment began. Between 8 and 14 subjects in each session and at least one pair played each game. Neutral language.

9. Experimental Results Productive Trust Unproductive Trust Seller Game Buyer Game p-value = 0.0783 p-value = 0.0028

10. Why don’t Buyers Trust? Unproductive Trust Game and Trust Game differ only in second mover payoffs. –first mover wants to “win.” –first mover fears second mover won’t be willing to “lose.” Asymmetric Endowment Trust Game is a combination of –Unproductive Trust Game (exit payoff) –Trust Game (second mover decision) Asymmetric Endowments Trust Game

11. Experimental Results Trust Game Asymmetric Unproductive Endowments Trust Game Trust Game (Buyer Game) p-value = 0.8378 p-value = 0.6783p-value = 0.0580 p-value = 0.0662

12. Conclusions Productivity of Trust matters –Sellers are more likely to complete a trade. (Sorry No CODs) –People are more generous when the cost of giving is lower. (confirms Andreoni and Vesterlund 2001 with double blind payoffs) –Trust game may not be appropriate model of trade. Unproductive first movers are less willing to trust because they wrongly anticipate that productive second movers are not willing to take smaller relative payoff. Behavior in productive trust game is similar to trust game (robustness of Cox and Deck double blind payoff results).