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Department of Economics, WU (Wirtschaftsuniversität Wien) Working papers, Department of Economics, WU (Wirtschaftsuniversität Wien)

No 212:
Learning to trust, learning to be trustworthy

Ulrich Berger ()

Abstract: Interpersonal trust is a one-sided social dilemma.Building on the binary trust game, we ask how trust and trustworthiness can evolve in a population where partners are matched randomly and agents sometimes act as trustors and sometimes as trustees. Trustors have the option to costly check a trustee's last action and to condition their behavior on the signal they receive. We show that the resulting population game admits two components of Nash equilibria. Nevertheless, the long-run outcome of an evolutionary social learning process modeled by the best response dynamics is unique. Even if unconditional distrust initially abounds, the trustors' checking option leads trustees to build a reputation for trustworthiness by honoring trust. This invites free-riders among the trustors who save the costs of checking and trust blindly, until it does no longer pay for trustees to behave in a trustworthy manner. This results in cyclical convergence to a mixed equilibrium with behavioral heterogeneity where suspicious checking and blind trusting coexist while unconditional distrust vanishes.

Keywords: trust game, evolutionary game theory, reputation, best response dynamics; (follow links to similar papers)

JEL-Codes: C72,; C90; (follow links to similar papers)

January 2016

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