Trust and Reciprocity Under Asymmetric Information

We analyze the effects of introducing asymmetric information in an investment game (Berg et al., 1995), in which the division of an economic surplus between a trustor and a trustee is not contractible. Backward induction suggests that rational self-interested players would not voluntarily engage in any transaction, unless they expect trust and reciprocity to play a role in determining the behavior of their counterparts. In our experiment, only the trustee is aware of the size of the surplus obtained, so the trustor cannot tell if a low back-payment corresponds to a low or a high level of reciprocity. The introduction of asymmetric information in the investment game does not reduce the amounts sent and returned, when compared with previous experimental studies. Moreover, average payback levels increase with the average amount sent. Expectations about other's behavior and risk attitude are also elicited in the experiment. Our results show that the first movers' choices are functions of their expectations about the second movers' payback, and the second movers' choices depend on the difference between the amount the first movers have sent to them and their expectations about this amount