Discrimination and In-group Favoritism in a Citywide Trust Experiment

This paper provides field experimental evidence on the prevalence and determinants ofndiscrimination and in-group favoritism in trust decisions. We observe choices of aboutn1,000 inhabitants of the city of Zurich who take part in a sequential trust game, in whichnfirst movers can condition their investments on the residential districts of second movers.nOur main results can be summarized as follows: First movers discriminate significantly in their investment choices, i.e., strangers receive different investments depending on thendistrict they live in. The systematics of the discrimination pattern is underlined by data from an additional newspaper study, where participants correctly guessed the outcome of the study. In terms of district characteristics two factors seem to be key for a district'snreputation: while expected trustworthiness of a district increases in the socio-economicnstatus it decreases in the degree of ethnic heterogeneity. Observed discrimination is notnjust based on mistaken stereotypes but can at least partly be classified as statistical discrimination. This can be inferred from the fact that, on a district level, both expected return on investment and actual investments are positively correlated with actual backntransfers. First movers correctly anticipate different levels of trustworthiness and discriminate accordingly. Furthermore, we provide evidence of in-group favoritism, i.e., peoplentrust strangers from their own district significantly more than strangers from other dis-ntricts. Finally, we discuss individual determinants of discrimination and in-group favoritism