Moral Hazard and Reciprocity

Abstract: We investigate the motives behind reciprocal behavior by making selfish acts anonymous but not common knowledge. In one treatment, subjects were assigned to the role of proposer or responder and played a trust game with random matching for 20 rounds. In a second treatment, the modified game, the procedures were the same but responders were allowed to choose with only 80% probability. With 20 % probability responders were restricted to keep any money passed. Only responders knew whether they were restricted or not. We find that the behavior of responders is different in this modified trust game. The fact that responders can hide selfish acts generates more selfish behavior. This in turn makes proposers less likely to pass money to responders, thereby destroying trust. We find important session effects in the standard trust game but less so in the modified game. Our experiments show that information conveyed in actions is important to subjects ’ decisions. JEL Codes: C91, D82 1