Overview: The initial decision maker in a "trust game" decides how much
money to pass to the other person. All money passed is increased by a
factor, M > 1, and the second mover then decides how much of this to
return to the first mover and how much to keep.
The Nash equilibrium for selfish preferences is to pass nothing, since a
self-interested person would return nothing in the final stage.
The game highlights issues of reciprocity and strategy, and the extent
to which observed behavior is "rational" from a selfish, strategic perspective.
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Money passed may be viewed as a risky investment
that will pay off if the second mover reciprocates. Notions of
trust and reciprocity should come up in
class discussion. The seminal research paper in this area is Berg, Dickhaut, and McCabe (1995)
"Trust, Reciprocity, and Social History," GEB.
Vecon Lab - November 21, 2017