Academic journal article Economic Inquiry

Three-Player Trust Game with Insider Communication

Academic journal article Economic Inquiry

Three-Player Trust Game with Insider Communication

Article excerpt

I. INTRODUCTION

Trust and reciprocity play important roles in economic interactions. The most frequently used measure of trust and reciprocity in economics is based on a two-player trust game, proposed by Berg, Dickhaut, and McCabe (1995). In this game, the first player (trustor) sends any part of his endowment to the second player (trustee). The amount sent is tripled and the second player decides how much to return. Berg et al., as well as many replications, show that most participants display trust and trustworthiness contrary to self-interested profit-maximizing behavior (Burks, Carpenter, and Verhoogen 2003; Glaeser et al. 2000; McCabe, Rassenti, and Smith 1998; McCabe, Rigdon, and Smith 2003; McCabe and Smith 2000). However, the bilateral relation in the two-player trust game rules out the multiple levels of trust that often emerge in real life when more than two agents are involved. For example, customers trust that the retailer will link them to a reliable producer. Safari travelers rely on their domestic travel company to match them with a high-quality foreign travel agent in Africa. Web businesses connect people with hotels, houses, condominiums, and other accommodations for rent. In all these relationships, the retailer, the domestic travel company, and the web businesses serve as a middleman linking users to goods and services. Whether to purchase via a middleman depends on the degree to which users are willing to accept vulnerability based on positive expectations of both the middleman and the provider. The redistribution of the benefits in these types of transactions is mainly controlled by the last player in the chain who provides goods or services to the customer and pays a commission to the middleman for making the linkage.

Multilevel trust interactions are also common in financial markets. For example, a person investing in a bond fund must trust the fund manager to correctly represent the bonds in the fund. The fund manager, in turn, must trust the bond issuers. The same intuition applies in the fund of funds (FOF) industry, where the manager of a hedge fund company invests in other funds instead of individual securities. Thus, multiple (direct and indirect) levels of trust are required between the individual investor, the hedge fund manager, and the FOF manager. Finally, multilevel trust is crucial in workplaces where the workers must not only trust their managers to report their performance truthfully to the CEO, but also trust that the CEO will appropriately reward their performance.

This study provides a framework for understanding multilevel trust interactions in complex environments involving direct and indirect interactions among multiple players. We depart from the conventional two-player trust game of Berg, Dickhaut, and McCabe (1995) by introducing the third player. In our three-player trust game, the three players move sequentially. (1) The first player sends any portion of his endowment to the second player, with the amount being tripled. (2) The second player then decides how much to send to the third player, with the amount being tripled again. (3) Finally, the third player decides the final allocation among three players. The three-player trust game captures the essential elements of complex multilevel trusting and reciprocal behavior in a simplified setting.

Moreover, trust in multilevel interactions depends on the thickness and the pattern of the links between players. One of the indispensable social lubricants for the network of trust and reciprocity is communication. The multilevel interactions introduced by adding the third player provide us a useful platform to explore our second research question: what are the internal and external effects of communication on trust and reciprocity? There are many potential channels of communication that one can investigate in the three-player trust game, but the considerable complexity that arises with the introduction of communication is nontrivial. …

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