How to identify trust and reciprocity

This paper uses a three-games (or triadic) design to identify trusting and reciprocating behavior. A large literature on single-game trust and reciprocity experiments is based on the implicit assumption that subjects do not have altruistic or inequality-averse other-regarding preferences. Such experimental designs test compound hypotheses that include the hypothesis that other-regarding preferences do not affect behavior. In contrast, experiments with the triadic design do discriminate between transfers resulting from trust or reciprocity and transfers resulting from other-regarding preferences that are not conditional on the behavior of others. Decomposing trust from altruism and reciprocity from altruism or inequality aversion is critical to obtaining empirical information that can guide the process of constructing models that can increase the empirical validity of game theory.     

Reciprocity under moral wiggle room: Is it a preference or a constraint?

We analyze reciprocal behavior when moral wiggle room exists. Dana et al. (Econ Theory 33(1):67–80, 2007) show that giving in a dictator game is inconsistent with distributional preferences as the giving rate drops when situational excuses for selfish behavior are provided. Our binary trust game closely follows their design. Only a preceding stage (safe outside option vs. enter the game) is added in order to introduce reciprocity. We find significantly lower rates of selfish choices in the trust baseline in comparison to our treatments that feature moral wiggle room manipulations and a dictator baseline. It seems that reciprocal behavior is not only due to people liking to reciprocate but also because they feel obliged to do so.     

Trust, Reciprocity, and Social History: A Re-examination

Berg et al. (Games and Economic Behavior, 10, pp. 122–142, 1995) study trust and reciprocity in an investment setting. They find significant amounts of trust and reciprocity and conclude that trust is a guiding behavioral instinct (a primitive in their terminology). We modify the way information is presented to participants and, through a questionnaire, prompt strategic reasoning. To our surprise, none of our various treatments led to a reduction in the amount invested. Previously reported experimental results to the contrary did not survive replication. Our results suggest that those by Berg, Dickhaut, and McCabe are rather robust to changes in information presentation and strategic reasoning prompts. We discuss the implications of these findings.     

Social norms and trust among strangers

We study the development of a social norm of trust and reciprocity among a group of strangers via the “contagious strategy” as defined in Kandori (1992). Over an infinite horizon, the players anonymously and randomly meet each other and play a binary trust game. In order to provide the investors with proper incentives to follow the contagious strategy, there is a sufficient condition that requires that there exists an outside option for the investors. Moreover, the investorsʼ payoff from the outside option must converge to the payoff from trust and reciprocity as the group size goes to infinity. We show that this sufficient condition is also a necessary condition to sustain any sequential equilibrium in which the trustees adopt the contagious strategy. Our results imply that a contagious equilibrium only supports trust if trust contributes almost nothing to the investorsʼ payoffs.     

Socio-ecological explanations for crowding-out effects from economic field experiments in southern Africa

Economic and psychological literature mentions three conditions under which the crowding-out effect of pro-social behaviour is likely to occur and to crowd out citizens' moral obligations to behave co-operatively. I use a framed field experiment on joint extraction from a common-pool resource (CPR) where the crowding-out effect has already been reported before in combination with the trust game carried out in farming communities of Namibia and South Africa to replicate these conditions. The research design and the cross-cultural setting enable to explicitly control for these effects. The results of the experiments support that the crowding-out effect depends on:

• •The nature of the external intervention (controlling vs. supportive external intervention)
• •The degree of participants self-determination (high vs. low self-determination in the group)
• •A society's norms of trust and reciprocity (high vs. low trust within the society)

The results imply that outside regulations aiming to conserve natural resources risk worsening the situation when neglecting democratic legitimization as well as local community norms.     

Socio-ecological explanations for crowding-out effects from economic field experiments in southern Africa

Economic and psychological literature mentions three conditions under which the crowding-out effect of pro-social behaviour is likely to occur and to crowd out citizens' moral obligations to behave co-operatively. I use a framed field experiment on joint extraction from a common-pool resource (CPR) where the crowding-out effect has already been reported before in combination with the trust game carried out in farming communities of Namibia and South Africa to replicate these conditions. The research design and the cross-cultural setting enable to explicitly control for these effects. The results of the experiments support that the crowding-out effect depends on:

•

The nature of the external intervention (controlling vs. supportive external intervention)

•

The degree of participants self-determination (high vs. low self-determination in the group)

•

A society's norms of trust and reciprocity (high vs. low trust within the society)

The results imply that outside regulations aiming to conserve natural resources risk worsening the situation when neglecting democratic legitimization as well as local community norms.     

External and internal consistency of choices made in convex time budgets

We evaluate data on choices made from convex time budgets (CTB) in Andreoni and Sprenger (Am Econ Rev 102(7):3333–3356, 2012a) and Augenblick et al. (Q J Econ 130(3):1067–1115, 2015), two influential studies that proposed and applied this experimental technique. We use the weak axiom of revealed preference (WARP) to test for external consistency relative to pairwise choice, and demand, wealth and impatience monotonicity to test for internal consistency. We find that choices made by subjects in the original Andreoni and Sprenger (Am Econ Rev 102(7):3333–3356, 2012a) paper violate WARP frequently; violations of all three internal measures of monotonicity are concentrated in subjects who take advantage of the novel feature of CTB by making interior choices. Wealth monotonicity violations are more prevalent and pronounced than either demand or impatience monotonicity violations. We substantiate the importance of our desiderata of choice consistency in examining effort allocation choices made in Augenblick et al. (Q J Econ 130(3):1067–1115, 2015), where we find considerably more demand monotonicity violations, as well as many classical monotonicity violations which are associated with time inconsistent behavior. We believe that the frequency and magnitude of WARP and monotonicity violations found in the two studies pose important confounds for interpreting and structurally estimating choice patterns elicited through CTB. We encourage researchers employing CTB in present and future experiments to include consistency tests in their design and pre-estimation analysis.     

Antipeponthos and reciprocity: the concept of equivalent exchange from Aristotle to Turgot

In modern discussions of reciprocity the concept is distinguished from that of self-interested exchange. In the problem of value in exchange, however, as set up in Aristotle’s Nicomachean Ethics the concept of reciprocity (antipeponthos) as equivalent exchange was central in commercial transactions. The paper discusses (1) the concept of antipeponthos in Aristotle, (2) how issues of trust and inequality of services provided were dealt in Aristotle and (3) the trajectory of the concept of equivalent exchange from Aristotle to Turgot.     

Trust and reciprocity in inter-individual versus inter-group interactions: The effects of social influence, group dynamics, and perspective biases

Using an experimental trust game, I examine whether the perspectives and behavior of group representatives and consensus groups differ from those of the same individuals in an analogous inter-individual situation. A primary goal of this research is to extend past work on trust and reciprocity by examining the impact of the social contexts within which social interactions are characteristically embedded. Specifically, this research concerns whether norms and dynamics of trust and reciprocity differ in the contexts of inter-individual and inter-group interactions. First, I examine whether dynamics of trust and reciprocity differ in various inter-group interactions where inter-group decisions are operationalized as 1) autonomous group representatives, i.e., individuals who are given the responsibility of unilaterally making a decision on behalf of a three-person group engaging with a group representative of another such group; and 2) consensus groups, i.e., group members making a consensus trust or reciprocity decision for their groups via a collective process with another such group. Results of these studies show that 1) people trust less and reciprocate less when responsible for a group or organizational decision as autonomous group representatives; 2) consensus groups do not differ from individuals in their level of trust but show dramatically less reciprocity. The group consensus mechanism in fact produced by far the lowest reciprocity level, significantly lower than that exhibited by either individuals or autonomous group representatives. Thus, inter-group trust and reciprocity dynamics are not readily inferable from their inter-individual counterparts. Moreover, an important implication is emerging here: the extent and direction of the discrepancy between individual and group choices in regard to trust and reciprocity levels and possibly other social preferences in general may depend importantly on the precise details of the group decision-making mechanism, for example whether decisions are made consensually, by majority vote, or by a group leader or representative. In addition to examining the level of trust and reciprocity that occur in these various situations, I also studied, using both behavioral and questionnaire data, the roles of self-interest, social influence, and group dynamics in trust and reciprocity perceptions and behavior. The results showed that there exist discrepancies between behavioral forecasts and the actual behavior, and that trusting behavior is driven strongly by expectation of level of reciprocation, while reciprocating behavior is driven strongly by the difference between trust expectation and actual trust received.     

Social norms, information, and trust among strangers: theory and evidence

Can a social norm of trust and reciprocity emerge among strangers? We investigate this question by examining behavior in an experiment where subjects repeatedly play a two-player binary “trust” game. Players are randomly and anonymously paired with one another in each period. The main questions addressed are whether a social norm of trust and reciprocity emerges under the most extreme information restriction (anonymous community-wide enforcement) or whether trust and reciprocity require additional, individual-specific information about a player’s past history of play and whether that information must be provided freely or at some cost. In the absence of such reputational information, we find that a social norm of trust and reciprocity is difficult to sustain. The provision of reputational information on past individual decisions significantly increases trust and reciprocity, with longer histories yielding the best outcomes. Importantly, we find that making reputational information available at a small cost may also lead to a significant improvement in trust and reciprocity, despite the fact that most subjects do not choose to purchase this information.     

Are the choices of people stochastically rational? A stochastic test of the number of revealed preference violations

Revealed preference tests are frequently used to check data on the behavior of agents for consistency with economic theory. Unfortunately these tests lack a stochastic element and thus one violation of revealed preference causes a rejection of the behavior being tested. To remedy this lack of a stochastic element in revealed preference analysis, we suggest a general, simple, and intuitive statistical procedure to test whether the observed number of violations is more consistent with a pre-specified type of non-degenerate behavior than with rational behavior. We illustrate this general procedure with an example using uniform random behavior that allows researchers to test whether the actual number of violations of revealed preference is more consistent with uniform random behavior than rational behavior. This statistical test takes advantage of the fact that nonparametric revealed preference tests involve known prices and expenditures. Our illustrative example is accompanied by some Monte Carlo exercises showing that the uniform test performs very well. We implement our test using datasets from two well-known economic experiments. One is a dataset on altruistic choices from Andreoni and Miller (Econometrica 70:737–753, 2002). The second is a dataset on the choices made by subjects who act within a token economy from Battalio et al. (West Econ J 11:411–428, 1973) and Cox (Econ J 107:1054–1078, 1997). We find that for a majority of subjects in one altruistic behavior sub-experiment uniform random behavior can be rejected in favor of rational behavior at the 10 % level of significance. For all but one subject, living in the token economy, uniform random behavior cannot be rejected. For that one subject in the token experiment uniform random behavior is rejected in favor of perverse economic behavior.     

Decomposing trust and trustworthiness

What motivates people to trust and be trustworthy? Is trust solely “calculative,” based on the expectation of trustworthiness, and trustworthiness only reciprocity? Employing a within-subject design, we run investment and dictator game experiments in Russia, South Africa and the United States. Additionally, we measured risk preferences and expectations of return. Expectations of return account for most of the variance in trust, but unconditional kindness also matters. Variance in trustworthiness is mainly accounted for by unconditional kindness, while reciprocity plays a comparatively small role. There exists some heterogeneity in motivation but people behave surprisingly similarly in the three countries studied.     

Unintended Effects of Targeting an Environmental Rebate

When designing schemes such as conditional cash transfers or payments for ecosystem services, the choice of whom to select and whom to exclude is critical. We incentivize and measure actual contributions to an environmental public good to ascertain whether being excluded from a rebate can affect contributions and, if so, whether the rationale for exclusion influences such effects. Treatments, i.e., three rules that determine who is selected and excluded, are randomly assigned. Two of the rules base exclusion on subjects’ initial contributions. The third is based upon location and the rationales are always explained. The rule that targets the rebate to low initial contributors, who have more potential to raise contributions, is the only rule that raised contributions by those selected. Yet by design, that same rule excludes the subjects who contributed the most initially. They respond by reducing their contributions even though their income and prices are unchanged.     

Exploring Ambiguity and Familiarity Effects in The “Earnings Game” Between Managers and Investors

Prior evidence suggests that managers and investors play an earnings game in which managers bias their earnings forecasts downward as the earnings announcement date approaches. Knowing managers’ incentives to provide biased guidance, investors still revise their expectations downward helping to create “positive earnings surprises.” Using a 2 (ambiguity) × 2 (familiarity) between subject randomized experimental design where MBA students playing the roles of manager and investor answer a series of questions related to earnings guidance, we investigate whether earnings environment ambiguity and manager-investor familiarity influence behavior during the “earnings game.” In general, results from this study suggest that ambiguity contributes to managers’ propensity to mislead and investors’ propensity to follow, and a false sense of familiarity may amplify investors’ reliance on managers’ guidance.     

Convergence in income inequality? evidence from panel unit root tests with structural breaks

This paper empirically tests whether there is evidence of convergence in income inequality, as predicted by several versions of the neoclassical growth model, using a large panel of annual data for the 48 contiguous states in the US over the 1916?C2005 period. By implementing the panel LM unit root test developed by Im et?al. (Oxford Bull Econ Stat 67:393?C419, 2005, Panel LM unit-root tests with trend shifts, Mimeo, 2010) that allows for the presence of structural breaks and heterogeneity in the panel, we find overwhelming evidence in support of convergence in income inequality. In addition, the results are robust to alternative inequality indicators used, different notions of stochastic convergence defined, and additional cross-sectional correlation considered.     

An analysis of quasi-qualification,modified auditor opinions and special treatment status on China's Shenzhen market

The development of accounting, auditing and capital markets in China were an integral component of China's economic reforms; auditing was regarded as being critically important to achieving the desired policy objective of delivering a market economy (Yang and Yang, 1998 Yang, J. W. and Yang, J. 1998. The Handbook of Chinese Accounting (in Chinese), Hong Kong: Oxford University Press.  [Google Scholar]). This article examines the quasi-qualification hypothesis and tests whether investors valued the introduction of Special Treatment (ST) status for firms in 1998. Our empirical analysis fails to find significant support for the quasi-qualification hypothesis. In contrast, it appears that the issuance of ST status was valued by investors; the issuance of ST status led investors to discriminate between firms.     

Rating Agencies – An Experimental Analysis of Their Remuneration Model

Does it matter who pays for ratings? Yes, but not for the rating agencies’ behavior. These are the findings of our experiment where we analyze the effect of the remuneration model of rating agencies on their assessments as well as on investors’ and issuers’ behavior. First, we find that rating agencies’ assessments are comparable whether the agency is (partially) paid by issuers, investors or solely by the experimenter. Issuers, on the other hand, more often do not return investor's trust when they or investors pay for ratings. Further, investors more often act according to the agencies’ recommendations when they have to pay for this information.     

A Re-examination of the Performance of Value Strategies in the Athens Stock Exchange

This study tests the performance of contrarian (value) strategies in the Athens Stock Exchange (ASE) in a recent period of time (2003–8) on the basis of the price to earnings ratios, dividend yields, firm size (market value), market to book ratios, financial leverage ratios, and market beta. Apart from the univariate portfolio analysis, we implement a novel panel data analysis based on the procedure suggested by Pesaran (2004, Econometrica 74:967–1012, 2006) that provides a valid estimation and inference under cross sectional dependence. Our portfolio analysis results highlight for investors in the ASE the superiority of value strategies formed on the basis of stocks with low price-to-earnings, high dividend yield ratios, and low market-to-book ratios. Our panel data analysis results depend on whether or not we correct for the problem of cross-sectional correlation in the regression residuals as suggested by Pesaran’s (Econometrica 74:967–1012, 2006) method. When we correct for this problem, we obtain evidence which support only a negative association between annual stock returns and market-to-book ratios. This may imply to investors that an adoption of a value strategy based on the market-to-book ratio may constitute a safer option compared with the other two alternatives suggested by the portfolio analysis results.     

Diversification versus optimality: is there really a diversification puzzle?

In this paper, we provide a general valuation of the diversification attitude of investors. First, we empirically examine the diversification of mean-variance optimal choices in the US stock market during the 11-year period 2003–2013. We then analyze the diversification problem from the perspective of risk-averse investors and risk-seeking investors. Second, we prove that investors’ optimal choices will be similar if their utility functions are not too distant, independent of their tolerance (or aversion) to risk. Finally, we discuss investors’ attitude towards diversification when the choices available to investors depend on several parameters.     

Credit ratings and corporate disclosure behaviour: evidence from regulation fair disclosure in Korea

This article provides evidence that firms with high market expectations disclose more information to investors, utilizing the fair disclosure regulation in Korea to proxy for their disclosure choices. This finding is consistent with the argument that in order to retain their dominant positions, highly evaluated firms are more concerned about the market’s perception of them as providers of timely and detailed disclosure. We also find that the impact of market expectations on disclosure is more pronounced for chaebol firms. Combined with prior research on the relationship between firm performance and voluntary disclosure, we provide important implications for the determinants of corporate disclosure