The Market Allocation of Property Rights and the Destruction of Trust

The frequent observation of trusting and trustworthy actions in sequential decision-making environments is a primary finding in behavioral game theory. When scarce bargaining rights are allocated by a competitive pricing process, can we expect to see the same level of cooperative behavior? This paper studies the effect of a competitive allocation mechanism on trust and trustworthiness using controlled experiments. We auction off participation slots of a trust game by a multiple-unit ascending-clock auction. The remaining subjects at the close of the auction are randomly matched into pairs to play a trust game. In the control group, subjects are randomly selected to play the trust game after paying entry fees equal to the equilibrium prices in the auction treatment. We find that subjects show significantly less trust and trustworthiness when the market mechanism allocates the trust-game slots. Both the send amount and return amount converges to the subgame perfect equilibrium prediction, and subjects earn lower payoffs on average. We then consider a behavioral model with players' other-regarding preferences as their private information. We show that the market mechanism select less trustworthy individuals into the subsequent trust game and players eventually form rational expectations about this selection effect. Our finding may help to explain the widespread destruction of trust and trustworthiness in transition economies such as post-Soviet-Union and Central-Eastern Europe.