direct and indirect trust and reciprocity

DIRECT AND INDIRECT TRUST AND RECIPROCITY^

Nancy R. Buchan *Rachel T.A. Croson ** Robyn M. Dawes ***

Abstract

We examine the extent to which people trust and reciprocate in situations of direct and indirect reciprocity. Our first study shows that as the potential for direct reciprocity between the trustor and reciprocator decreases, levels of trust and reciprocation decrease also; yet, on average, these levels remain significantly above equilibrium predictions. Our second study extends these results to three Asian countries. We find not only that levels of trust and reciprocation vary across countries, but that the drop-offs in trust across direct and indirect reciprocity conditions vary across countries as well. These differences in drop-offs suggest a significant country influence on the boundaries of trust.

^ We thank the participants at the Economic Science Association, the Society for Judgment and Decision Making, and the European Association of Experimental Social Psychology meetings along with seminar participants at Yale, Texas A&M University and UC San Diego for their insightful comments and feedback on this research. We are also grateful to Peter Dickson for his input on the manuscript. The second author’s research was supported by NSF grant SES# 98-76079-001.

I. Introduction

In a recent issue of Science, biologists hail trust and reciprocity as the “basis of all human

systems of morality” [Nowak and Sigmund, 2000]. Indeed, the growing literature on trust across

a number of academic fields focuses on its centrality to every area of our lives. Economists have

demonstrated that a rise in country-level trust increases economic growth [Knack and Keefer

1997]. Political scientists and economists have shown that the level of trust in a society

influences governmental and judicial efficiency [Putnam 1993; LaPorta, et al. 1997].

Psychologists maintain that trust plays a prominent role in the emergence of cooperation in

problems of collective action [Dawes 1980]. Business researchers have claimed that being a

“trusted cooperator” within a global network is requisite to achieving competitive advantage

[Morgan and Hunt 1994]. Finally Alan Greenspan underscored the critical nature of trust to our

economic way of life, “Trust is at the root of any economic system based on mutually beneficial

exchange… if a significant number of people violated the trust upon which our interactions are

based, our economy would be swamped into immobility” [1999].

This previous research demonstrates the aggregate benefits of trust to groups of people or

to societies as a whole. In contrast, most of the experimental research on trust in economics has

focused on trust and reciprocity at the individual level [e.g. Fehr et al. 1993; Berg, Dickhaut and

McCabe 1995, Glaeser et al. 1999]. This individual level research demonstrates that trusting

behavior and reciprocation are robust across a number of economic contexts. However, these

studies all have examined trust in situations of direct reciprocity – where the actions of the

reciprocator (in whom one placed trust) directly impact the fortunes of the trusting individual. In

contrast, in societal-level trust, reciprocity is likely to be indirect. What is needed is a link

between our understanding of trusting behavior on the part of individual and our knowledge of

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trust and its influence on society. Our paper begins constructing this link by experimentally

examining trust in the presence of indirect reciprocity - where the actions of the reciprocator (in

whom one placed trust) will impact the fortunes of someone other than the trusting individual.

Some empirical research provides a clue to this link by demonstrating the crucial role of

trust in sustaining successful export clusters [e.g. Krugman 1995; Schmitz 1999]. The key to

achieving such trust among cluster members, suggests Sabel [1993], is a shift in thinking of trust

as rational self-interest to trusting in a shared sense of community with a common fate.

In this paper we examine the extent to which economic actors are willing to trust for the

benefit of the group or community. We begin by examining the extent to which individuals trust

in situations of direct reciprocity, and compare that to levels of trust and reciprocation displayed

in two different situations of indirect reciprocity. In one situation a member of the trustor’s

group will benefit from potential reciprocation, in the other, a random member of society will

benefit from the trustor’s actions.

To examine indirect trust we extend the trust game devised by Berg, Dickhaut, and

McCabe [1995] by manipulating the target of potential reciprocation. In the original trust game

two players, the sender and the responder, are each given an endowment. The sender is told he

can send some, all, or none of his endowment to his anonymous partner, the responder. Any

money sent is tripled. The responder then chooses how much of her total wealth (her

endowment plus the tripled money) to return to the sender. Any money the responder does not

return is hers to keep; thus the responder plays a dictator game with the pool of money generated

by the sender’s actions. The unique subgame perfect Nash equilibrium for this game (for self-

interested actors) is for the responder to return no money, and thus for the sender to send none.

In our experiment we label this the direct condition because of the direct nature of the potential

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reciprocation (the responder returns money directly to the sender from whom she received it).

This basic trust game is similar to the economic setting of one-shot investing with imperfect

contracts. The sender (investor) creates value with his investment, but cannot perfectly contract

with the responder (agent) to ensure sharing of that value created.

We extend the direct trust experiment by adding two conditions to examine different

types of indirect reciprocity. In the group condition, the target of potential reciprocation is

someone in the sender’s (experimental) group. In the society condition, the target of potential

reciprocation is a randomly chosen person from (the experimental) society. In both indirect

conditions the equilibrium remains for the responder to return no money and for the sender to

send none.

Although our experiment protects anonymity, the group condition is similar to the type of

indirect trust found in exporting clusters; another member of a small group benefits from one

player’s trusting behavior. The society condition is similar to the situation of contributing to a

public good; another member of a large society benefits from one player’s trusting behavior.

Our first study compares these three treatments using subjects from the United States. Our

results demonstrate that as the potential for direct reciprocity between the sender and

reciprocator decreases, levels of trust and reciprocation decrease also; yet, on average, these

levels remain significantly above equilibrium predictions.

In our second study, we extend this experimental design to three Asian countries: China,

Japan and Korea. We examine the extent to which these individuals trust in situations of direct

and indirect reciprocity. We then aggregate these results to the country level to discern whether,

as some have suggested, there are differences across countries in levels of trust [Arrow 1972;

Knack and Keefer 1997; Fukuyama 1995]. Our results reveal differences across countries in

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levels of trust and reciprocity – although in ways different than predicted by theories from

economics or cross-cultural research. Perhaps the most interesting finding from this study is an

interaction between condition and country. That is, across the four countries, we find different

drop-offs in trust extended across experimental conditions; in the US and China, the drop-off in

trust comes between the direct and group conditions (direct > group = society). In Japan and

Korea, the drop-off occurs between the group and society conditions (direct = group > society).

For a preview of these results, the reader is referred to Figure VI. These results imply not just

that the extent of trust varies across countries, but that the reliance of trust on direct reciprocation

varies across countries as well.

Our paper continues as follows. In Section II we provide a review of the literature on

indirect trust and reciprocation and our hypotheses. In Section III we describe our methodology,

which is followed by a description of our results in Section IV. Sections V, VI and VII provide

hypotheses, methodology and results for the second study. In Section VIII we discuss the

implications of our results for economic behavior and conclude.

II. Previous Literature and Hypotheses

The trust game employed here has been widely used to examine trust and reciprocation in

economic settings.1 Deviations from the self-interested equilibrium of the game are attributed to

trust (on the part of the sender) or reciprocity (on the part of the responder). The first paper

using the trust game [Berg, Dickhaut, and McCabe 1995] reported significant levels of trust and

reciprocation; 30 of 32 senders sent money in the game (exhibited trusting behavior), and 24 of

those 30 decisions resulted in money returned. These results are also found in other settings.

For example, the experiments of Fehr, Kirchsteiger, and Riedl [1993] and Fehr, Gachter, and

1 Other, related games have been developed and tested experimentally as well, e.g. Kreps 1990, Rosenthal 1982.

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Kirchsteiger [1997] demonstrate that generous (trusting) behavior on the part of firms induces

similar reciprocal responses on the part of workers in the context of labor markets with

incomplete contracts. McKelvey and Palfrey [1992] observe similar trust and reciprocal

behavior in experiments based on the centipede game where each player can increase the pie by

trusting the other not to take the money and exit the game. In the peasant-dictator game of Van

Huyck, Battalio and Walters [1995], when the peasant moves before the dictator (as is the

sequence of moves in the trust game), peasants trust dictators more than predicted by economic

theory, and display trust most at low levels of endowment. Finally, Van der Heijden et al. [1998]

demonstrate the power of expectations of reciprocation in the poverty game by showing that

average gifts by senders were 40% higher when the responder would learn the size of the gift,

than when they would not.2 All of the above studies have experimentally demonstrated the

existence of trust and reciprocity under conditions of direct reciprocity. Based on this previous

research we hypothesize:

H1: We will observe positive amounts sent and reciprocated in the direct reciprocity condition.

However, we anticipate that trust and reciprocity will decrease in situations of indirect

reciprocity. Williamson [1993] suggests that trust is based, at least in part, on expectations of

reciprocation. It follows then, that if the chance of receiving direct reciprocation is absent, the

motivation to trust is decreased. Additionally, if reciprocation is based in part on a desire to

reward or punish a partner [as suggested by Fehr et al. 1993; Fehr et al. 1997; Abbink, Irlenbush,

and Renner 2000], then the propensity to reciprocate should be diminished in a context where the

2 Van der Heijden et al. [1998] also study a form of indirect reciprocation in their pension game. In this game, however, the self-interested motivation for trust is highly salient due to overlapping structure of the game; ie. I give to Player 1, but then Player 3, who gives to me, may reward or punish me for my actions to Player 1. This is in contrast to the group and society conditions in our experiment where the self-interested motivations for trusting and reciprocal behavior are clearly minimized.

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ability to reward or punish a trusting or non-trusting partner is removed. Therefore we

hypothesize:

H2: Amounts sent and reciprocated will be less in the indirect reciprocity conditions than in the direct reciprocity condition.

Finally, we suggest that trust and reciprocity are likely to be higher in the group condition

than in the society condition. Glaeser et al. [1999] demonstrate that the degree of social

connection between the sender and responder in trust games generally predicts the level of trust

and reciprocation.3 In a related (dictator) setting, Hoffman, McCabe and Smith [1996] conclude

that as social distance (isolation) increases, amounts given decrease. Similarly, experimental

research studying ingroup/outgroup biases in social dilemmas [Orbell, van de Kragt and Dawes

1988] and in a three person dictator game [Frey and Bohnet 1997] demonstrate that behavior

toward someone in one’s own group will be more favorable than behavior to someone who is not

a member. Based on this research, we believe that the degree of connectedness between the

sender, the responder, and the target of reciprocation will have a positive influence on trust and

reciprocation. Therefore we hypothesize:

H3: . Amounts sent and reciprocated will be higher in the group condition than in the society condition.

III. Experimental Design and Procedures

In this section we describe the experimental design and procedures that we use to test the

hypotheses above.

A. Experimental Design

One hundred and forty students from the University of Wisconsin-Madison participated

in this study. Subjects were primarily sophomore or junior students in economics or business

3 Glaeser et al. define “social connection” as the “number of friends they have in common, being members of the same race or nationality and the duration of their acquaintanceship” [p.4].

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classes who were paid their actual monetary earnings from the experiment. We ran three

sessions of the experiment, one for each of our conditions. Subjects signed up for a session

without knowledge of any differentiation in experimental conditions. Once arriving at the

experiment, subjects were randomly assigned to one of two rooms, the sender room or the

responder room. An effort was made to assign friends who came to the experiment together to

the same room. The reason was to minimize any perception on part of subjects that their partner

in the other room (though identified anonymously) could be their friend.

B. Experimental procedure

The experiment was run using double blind procedures; thus, the experimenter did not

know the identities of the subjects, and subjects’ identities were kept anonymous from one

another. Subjects were instructed not to talk or communicate with any other subjects during the

experiment. This “no communication” rule was enforced by monitors located in the

experimental rooms. The basic procedure for the trust game is as follows. Subjects in each room

received written instructions for the game, including a diagram of the game structure (Figures I,

II, and III below), and a unique subject ID number. The instructions also included a quiz

concerning the experimental procedure and the transactions involved, to make certain that all

subjects understood the task. All experimental instructions are available from the authors upon

request. Once subjects completed the quiz correctly, they were given a numbered envelope

containing the experimental fee of $10. The number on the envelope represented the subject’s

own identification number.

Senders removed their money and replaced in the envelope any money they wished to

send to the responder. Monitors collected the envelopes and took them to the experimenter in a

different room who recorded the amount sent, tripled it, and placed the tripled money into

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different numbered envelopes for delivery by another monitor to the appropriate responder.

Notice that this implements a double-blind procedure [Hoffman et al. 1996]. The monitor who

saw the participant did not know the amount they sent, while the experimenter, who saw the

amount sent, did not know the participant. The subjects, of course, did not know the identity of

their partner.

The responders then opened their envelopes, and decided how much of their own

experimental fee plus any (tripled) money received, to return to the appropriate responder. They

placed that amount back into their envelopes. Monitors collected the envelopes from the

responders and gave them to the experimenter who recorded the amounts returned, placed the

money back into the senders’ original envelopes, and forwarded the envelopes into the senders’

room for distribution by the monitors. At this point the experiment had ended. Subjects

completed a post-experimental questionnaire, were paid their earnings privately and dismissed.

C. Direct Condition

The direct condition is depicted in Figure I. This is the most basic condition in the

experiment, identical to that of Berg et al. [1995] and Glaeser et al. [1999], in which Sender A

sends some, all, or none of his money to Responder B. On the way from Sender A to Responder

B the experimenter triples the money. Responder B then has her own show up fee plus triple the

money sent by A, and can return some, all, or none of her total wealth to A. Aside from

explaining the experimental procedure, the wording on the instructions specific to this condition

is “You will interact with a Responder for purposes of this experiment.”

-----------------------------------------Insert Figure I about here-------------------------------------

D. Group Condition

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The group condition is depicted in Figure II. In this condition, Sender A sends money

(which is tripled by the experimenter) to Responder B. At the same time, Sender C sends money

(which is tripled by the experimenter) to Responder D. Responder B then returns some

proportion of her wealth to Sender C, while Responder D returns some proportion of his wealth

to Sender A. Aside from explaining the experimental procedure, the wording on the instructions

specific to this condition is “You will interact with three other people for purposes of this

experiment.” As an additional reinforcement of the group manipulation, each group was given

differently colored instructions.

-----------------------------------------Insert Figure II about here-------------------------------------

E. Society Condition

The society condition is shown in Figure III. In this condition, Sender A sends money

(which is tripled by the experimenter) to Responder B. At the same time, Responder D receives

money from a different, randomly chosen, sender in Sender A’s room. Responder D then returns

some proportion of his wealth to Sender A, while Responder B returns some proportion of her

wealth to a randomly chosen sender in Sender A’s room. Aside from explaining the experimental

procedure, the wording on the instructions specific to this condition is “You will interact with

two responders for purposes of this experiment.”

-----------------------------------------Insert Figure III about here-------------------------------------

IV. Results

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The dependent variables in our analysis are the amount sent by the sender to the

responder and the proportion returned by the responder. We calculate the proportion returned as

the amount responders returned divided by their total wealth (three times the amount the sender

sent plus the endowment). This proportion is the proportion of the pie that responders are

returning to senders in dictator-fashion.

For purposes of analysis, monetary amounts have been standardized on a scale from 0 to

1,000 units. Figure IV graphs the resulting data from this experiment in each of the three

conditions. The data for each condition are presented in descending order of amount sent, shown

as the thin bars. For example in the direct reciprocity condition, five of fourteen senders sent

their entire endowment for the experiment (1,000 units). The data are further sorted by the

proportion returned from this responder (shown as a black diamond) as the secondary axis on the

right. Continuing with the example of the direct condition, of the five responders who were sent

the sender’s full endowment of 1000 units, one responder returned 50% of their total wealth.

-----------------------------------------Insert Figure IV about here-------------------------------------

Table I provides the means and standard deviations in amount sent and proportion returned

across conditions.

-----------------------------------------Insert Table I about here-------------------------------------

A. Amount Sent

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Across all conditions subjects largely ignored the equilibrium of sending no money and

instead opted to trust. These results are consistent with previous results from the trust game in

the US [Berg et al. 1995]. The mean amount sent across all senders was 554 units (out of 1,000

units). In the direct condition zero senders sent nothing to their partners, in the group condition 2

of 28 senders sent nothing, and in the society condition 3 of 38 senders sent nothing.

The first column of Table II shows the results of regressions of amount sent on

experimental condition. In addition, gender and level of economics education were both entered

as controls in the analysis, neither however proved to have a significant influence on amount

sent.

-----------------------------------------Insert Table II about here-------------------------------------

First, we find strong evidence that subjects are willing to engage in direct trust, in support

of Hypothesis 1. Subjects also engage in indirect trust by sending money, even when they are

not the recipients of potential reciprocation. The mean amounts sent are 782.14 units in the

direct condition, 488.64 units in the group condition, and 505.46 units in the society condition.

Thus, even in the society condition where there is no potential for personally benefiting from

reciprocation, the amounts sent far exceed the equilibrium prediction.

However, results from the analysis of amounts sent reveal that subjects’ trust is

significantly and negatively influenced as the reciprocation becomes more indirect. The

coefficients for both the group and society conditions are negative and significantly different (at

the p<.01 level) from the direct condition (the omitted condition in the regression). Thus we see

significantly lower levels of trust as we move from the direct to the indirect reciprocity

conditions, as predicted by Hypothesis 2.

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Finally, orthogonal contrasts from regression 2 reveal that the amount sent in the society

condition is not significantly different than the amount sent in the group condition; F(1,69) =

0.08, ns. Thus we find no support for Hypothesis 3.

B. Proportion Returned

Table I above provides the means and standard deviations in proportions returned across

conditions. The second column of Table II shows the results of regressions of proportion

returned on experimental condition. As in the regression on amount sent, gender and level of

economics education were both entered as controls in the analysis; neither was significantly

related to the proportion returned.4 The amount sent by the sender to the responder was also

entered as a covariate in the regression model and was significantly related to the proportion

returned. This suggests that not only do responders who receive more return more absolutely,

they return more as a proportion of their earnings. Thus, the extent of reciprocation is clearly

influenced by the amounts sent.

We find strong evidence of reciprocity even when the reciprocation is indirect. The mean

proportions returned are .319 in the direct condition, .114 in the group condition, and .130 in the

society condition. Thus we have support for Hypothesis 1 of positive levels of reciprocity even

in the direct reciprocity one-shot game, and find deviations from equilibrium predictions in the

other conditions as well.5

4 Data from this study in the direct condition replicates the gender results in Croson and Buchan [1999]. Like the current results, Croson and Buchan found no effect of gender on amount sent. And as with the current results, Croson and Buchan found that women were significantly more reciprocal than men in the direct condition. The average proportion returned by women in the earlier experiment was 37.4%, versus 28.6% by men. In the direct reciprocity condition in the current experiment, the proportion returned by women is 37.2% versus 26.8% by men. Both differences are significant at the .05 level (t=2.24 and t=2.14 respectively). However, in this study we find no gender differences in conditions of indirect reciprocity.5A number of other measures of reciprocation have been suggested by colleagues, and we have tested three of them. The first is purely the absolute amount returned by the responder, the second the proportion of money received by the responder that was returned to the sender and the third, the amount

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Mirroring the results for amount sent, as the target of reciprocation becomes less direct

subjects’ propensities to reciprocate are significantly and negatively influenced. As in the

analysis of amount sent the coefficients for both the group and society conditions are

significantly different from the direct condition, the omitted condition in the regression (p<.01

for both). Thus, as with the levels of trust displayed, we see lower levels of reciprocation as we

move from the direct to the indirect reciprocity conditions, consistent with Hypothesis 2.

However, as with amounts sent, we find no significant differences between the group and

society conditions; F(1,69) = 0.72, ns. Thus our results are not consistent with Hypothesis 3.

C. Payback Decisions and Earnings

To gain an understanding of how the trust and reciprocation decisions influenced the

wealth of senders and responders in the experiment, we graphed the joint earnings of the players

in the manner done by Berg et al. [1995] across the conditions (Figure V). The large outer

triangle with points {(0,4,000), (1,000, 1,000) and (3,000, 1,000)} indicates the set of earnings

for the sender and responder pairs in which the responder’s final earnings equal at least her

endowment. The “No payback line” indicates where k (the amount reciprocated by the

responder) = 0. The “Breakeven line” represents the break-even point for the sender, k=1/3(3 x

Amount sent), and the area to the right of this line indicates positive returns to the sender. The

“Split total return line” denotes outcomes when the responder evenly splits the amount she

received; k= 1/2(3xAmount sent). The “ Split total earnings line” designates when the responder

splits total earnings inclusive of her show-up fee; k=2/3(3xAmount Sent). Note that points lying

below the (3000, 1000) line represent those pairs where the responder was excessively reciprocal

kept by the responder – responder’s endowment – amount sent by the sender. We ran analyses using each of these suggested measures and find that our main results are robust and that all four measures (including the one used in the paper) result in the same rankings of reciprocation across conditions and countries. For the sake of comparability to previous literature, we will use the proportion returned measure as has been used previously.

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and returned to the sender not only the entire amount received but also a portion of her own

endowment. Identical data points have been offset slightly.

-----------------------------------------Insert Figure V about here-------------------------------------

A regression on the value k with condition as an independent variable indicates

significant differences across conditions in the wealth distributions between the senders and the

responders. A Tukey HSD test comparing k across conditions shows that k is significantly

higher in the direct condition (k=.462), than in the group (k=.207), or the society (k=.205)

conditions (p<.05). Responders are splitting the total experimental earnings nearly equally with

senders in the direct condition, but in the group and society conditions senders are on average,

not quite breaking even.

Using the definition of reciprocity proposed by Berg et al. [1995], where a reciprocal

responder is one who returns at least as much as was sent, we see that in the direct condition nine

of 14 responders (57%) were reciprocal,6 in the group condition four of 28 responders (14%)

were reciprocal, and in the society condition five of 28 responders (17%) were reciprocal.

In summary, these results demonstrate that in the United States, subjects are willing to

engage in indirect as well as direct trust and reciprocity. Although levels of trust and

reciprocation decline as the potential for direct reciprocation between the sender and the

responder decreases, on average these levels in both the direct and indirect conditions remain

significantly above the self-interested equilibrium predictions. In the next study we investigate

whether there exist differences in levels of trust and reciprocation internationally, and 6 To compare this proportion with the results from Berg et al. [1995] we look only at the American direct condition in our experiment. In the Berg et al. experiment 46% of the responders who received money were reciprocal. In our experiment, 50% of the American responders who received money in the direct condition were reciprocal.

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specifically, extend our investigation of direct and indirect trust by comparing levels of trust and

reciprocation in each condition across countries.

V. Indirect Trust and Reciprocity Internationally

Our second study uses the methodology and analysis developed in the first study to

investigate the extent of direct and indirect trust and reciprocity in China, Japan and Korea.

This section will describe some previous literature and hypotheses relating to cross-national

differences in general levels of trust, the next describes the experimental procedures and controls

unique to the cross-cultural study, and the third offers results.

We have competing theories of the extent of trust in other countries; one based on

economics, the other two on cross-cultural research in psychology and sociology. The economic

theories rely on an evolutionary argument. Tullock [1985] suggests that when traders are able to

select their partners in a market with continuous public communication of previous outcomes,

the profitability of short-term opportunism is greatly reduced: “if you choose the noncooperative

solution, you may find you have no one to noncooperate with.” [Tullock 1985, p. 1080]. In

nations where free and open markets have existed for decades, a norm of trust and reciprocation

may thus have developed. This hypothesis suggests that cultures with a long and rich history of

free trading will exhibit higher levels of trust and reciprocity. Indeed, the conclusion of Smith

[1878], Hayek [1998], and Klein [1997] is that commercial trade elevates the general manners,

probity, trust and cooperation of a culture. Following this logic, we expect Chinese subjects to

exhibit the lowest levels of trust and reciprocity because modern free market commerce has only

been adopted by China in the last decade. American subjects should exhibit the highest trust and

reciprocity because the United States has had a long history of free market commerce, and the

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Korean and Japanese subjects should exhibit levels of trust and reciprocity somewhere in

between.

H4a: Amounts sent and reciprocated will be highest in the US, less in Korea and Japan, and least in China.

An alternative argument for national differences in trust originates in theories of social

capital [Coleman 1990; Gambetta 1988]. In a widely read book, Fukuyama [1995] developed

the thesis that a nation’s well-being and global competitiveness is dependent on the level of

cooperative trust (or social capital) inherent in the society. According to Fukuyama, trust is

nurtured in a culture through tradition, repetitive reinforcement, and vicarious learning (by

example). Trusting norms are transmitted as arational social habits. A major thesis developed

by Fukuyama is that the very strong bonds of kinship trust that have been observed to historically

exist in China and Korea create family in-groups and rest-of-the-culture out-groups. This reduces

the level of social capital outside families in those societies and has a negative impact on trust

and reciprocation among non-family members. In contrast, Fukuyama claims that the Japanese

and American national cultures are much more spontaneously sociable and trusting because of

Japan’s history of feudalism and the United State’s sectarian, Protestant heritage. Fukuyama’s

theory thus predicts that Chinese and Korean subjects will exhibit the lowest levels of trust and

reciprocity compared to the Japanese and American subjects.

H4b: Amounts sent and reciprocated will be greater in Japan and the US than in China and Korea.

Finally an ongoing debate of trustingness between Japan and the United States leads to

two competing hypotheses. The beginning of this debate came in a widely read and

controversial book in the popular business press by Ouchi [1981]. In it he argued (through the

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use of anecdotal evidence) that Japan’s unique culture fostered greater trust relative to that in the

United States, and that it was this trust that sustained the massive corporate networks in Japan

and led to its post-war economic success. The opposite view was taken by Yamagishi and

Yamagishi [1994], and by Hagen and Choe [1998]. Yamagishi and Yamagishi have

demonstrated through surveys, and Hagen and Choe through observation of buyer-seller

relationships in Japan, that Japanese have greater assurance of the behavior of a partner due to a

system of mutual monitoring and sanctioning within that society that demands cooperation.

Thus, they say, in the absence of uncertainty about a partner’s actions, vulnerability to the

partner’s behavior is missing, and behavior in Japan is not actually trusting but simply a

dependence on those sanctions. Thus, they argue, it is actually Americans who have higher

levels of generalized trust. In our experiment, given that there are no monitoring or sanctioning

mechanisms present to potentially influence seemingly greater trusting behavior by the Japanese,

these two views on trust in Japan and the United States lead to the following contrasting

hypotheses:

H5a: Amounts sent and reciprocated will be greater in Japan than in the US (Ouchi).H5b: Amount sent and reciprocated will be greater in the US than in Japan (Yamagishi and

Yamagishi; Hagen and Choe).

It should be noted that all of the theories presented here relate to differences in general

levels of trust across countries. Our study is the first to specifically examine cross-national

differences in direct versus indirect trust.

VI. Experimental Procedures Internationally

A total of 408 additional subjects participated in this experiment: 128 students from the

University of International Business and Economics in Beijing, China, 140 students from the

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University of Korea in Seoul and 140 students from Osaka University in Japan. In our analysis

we will compare results from these subjects with those from our US subjects as described in the

previous section. We retained the double-blind procedure in our experiment in order to prevent

self-presentation (face-saving) effects that may be particularly prevalent among Asian subjects

[Bond and Hwang 1995].

Cross-country controls

The international character of this second study warranted that we control for country or

culture-specific variables that could influence our results. Specifically, we addressed the

following issues as suggested by Roth et al. [1991].

Controlling for subject pool equivalency. We controlled for equivalency in educational

background and knowledge of economics among the subject populations in three ways: First,

the universities chosen for the experiment were all well-known universities in their countries.

Second, subjects were all sophomore or junior economics or business undergraduate students and

were paid for their earnings in the experiment and third, subjects were questioned about their

level of exposure to economic theory and to game theory in particular. Answers to these

questions are entered as covariates in the final analysis of results.

Controlling for currency effects. We controlled for purchasing power parity by choosing

denominations such that monetary incentives relative to subject income and living standards

were approximately equal across countries (as in Kachelmeier and Shehata [1992]). Amounts

used were Japan (2,000 yen), Korea (1,000 won), China (10 yuan). These amounts were based

on information from the US Bureau of Labor Statistics [Monthly Labor Review 1998], and on

the recommendations of three independent experts on each economy.

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Controlling for Language Effects. To control for any nuances in language which may impact

results across countries, instructions for the experiments in China, Japan, and Korea were

translated into the native language and back-translated into English using separate external

translators.

Controlling for Experimenter Effects. Various measures were taken to control for differences

among experimenters in different countries. First, in each country, the lead experimenter was an

advanced student in business, and a native of that country. Second, an extremely thorough

experimental protocol was designed based upon the procedure used in the United States and used

in all four countries. The protocol included information such as the positioning of the

experimenter in the room, and the method to be used in answering subject questions. Third, the

experimenter from the United States met with the lead experimenter in each country prior to each

experiment to brief them on the protocol and to run through a practice (no subjects) session with

them. Finally, the American experimenter was present in the data recording room while each

experiment was being conducted.

VII. Results Internationally

We replicate our analyses described in Section IV adding the data from China, Japan and

Korea. Table III depicts means and standard deviations of amounts sent and proportions

returned in the four countries.

-------------------------------------Insert Table III about here-------------------------------------

Amounts Sent

19

The first column of Table IV presents the results of a regression of Amount Sent on both

country and condition.

-------------------------------------Insert Table IV about here-------------------------------------

As hypothesized, we observe significant differences across countries in levels of trust.

We see significant negative coefficients for Japan and Korea, both at the p<.01 level. In this

experiment, Japanese and Korean subjects extended significantly less trust than did American

subjects (the omitted variable). A Tukey HSD test reveals that the amounts sent by American

and Chinese subjects significantly differed from the amounts sent by Japanese and Korean

subjects (p<.05).7 Thus, our results support neither the experience in free trade argument

(Hypothesis 4a) presented by Smith, Hayek and Klein (which predicted that levels of trust would

be higher in the United States than in Japan or Korea, which in turn would be higher than in

China) nor the culturally based argument (Hypothesis 4b) proposed by Fukuyama (which

predicted that levels of trust would be higher in the United States and Japan than in Korea or

China). The significant differences between the US and Japan shown in the Tukey HSD test do

support the hypothesis of Yamagishi and Yamagishi [1994] and Hagen and Choe [1998]

(Hypothesis 5b) that Americans are more trusting than the Japanese in the absence of sanctioning

or monitoring mechanisms to influence cooperation.

Perhaps the most interesting result from the experiment is the existence of significant

coefficients for the interaction terms Group x Japan (p<.05) and Group x Korea (p<.10). What

7 When testing for multiple comparisons throughout our analysis we employ the Tukey honestly significant difference (HSD) test. As discussed by Winer et al. [1991], the Tukey HSD test allows for multiple comparisons while controlling for the experimentwise error rate. When compared with other testing procedures (i.e. a series of T-tests, Dunn-Bonferroni, Duncan, Scheffe, or Newman-Keuls tests, etc.) the Tukey HSD and the Scheffe tests procedures are the most conservative and produce the lowest type-1 error rates.

20

these results reveal is the difference in the amount of trust exhibited by subjects from different

countries across the reciprocity conditions, as shown in Figure VI.

-----------------------------------------Insert Figure VI about here-------------------------------------

As can be seen in the graph, American and Chinese subjects trust the most in the direct

reciprocity condition, and much less, but relatively equal amounts, in the group and society

conditions. Japanese subjects on the other hand, trust roughly equally in the direct and group

conditions, but much less in the society condition. Finally Korean subjects seem to make a

distinction among all three conditions.

To tease out the significant interactions, we conducted analyses comparing mean amounts

sent across conditions for each national group. The results of the Tukey HSD tests reveal

different drop-offs in trust across countries. As an example, Tukey HSD tests demonstrate that

among American subjects, the mean amount sent in the direct condition of 782 units significantly

differed (at the p<.05 level) from the mean amount sent in the group condition of 489 units.

However this amount sent in the group condition did not significantly differ from the 505 units

sent by Americans in the society condition. Therefore, we conclude that the drop-off in trust

among American subjects occurs in the move from direct to indirect reciprocity. Tests in each of

the four countries reveal that among Chinese subjects as well as American subjects, significant

declines in trust occur between conditions of direct and indirect reciprocity (p<.05 for both).

Among Japanese and Korean subjects the significant decline in trust occurs between the group

and society conditions (p<.05 for Japan, p<.10 for Korea). Thus in Japan and Korea, group-level

21

indirect reciprocity generates as much trust as direct reciprocity. These differences suggest a

very real country influence on the boundaries of trust.

The analysis of proportions returned shown in the second column of Table IV also

reveals differences across countries in levels of reciprocation. We see weakly significant

positive coefficients for China and Korea, (p<.10 for both). In this experiment, Chinese and

Korean subjects were more reciprocal than were American subjects. A Tukey HSD test

comparing proportions returned across countries reveals that the proportions returned by

American and Japanese subjects were significantly lower than the proportions returned by

Chinese and Korean subjects (p<.05). Thus, our results suggest that the strength of norms of

reciprocity may differ across countries. Similar to our results with amount sent, while there were

differences across countries these differences were not those predicted by economic-based

theories (Hypothesis 4a which predicted the most reciprocation in the US and the least in China),

nor by Fukuyama’s social capital-based theory (Hypothesis 4b which predicted the most

reciprocation in the US and Japan and the least in China and Korea). The results for proportion

returned also do not support the research suggesting differences in reciprocation between the US

and Japan (Hypothesis 5 a and b).

Unlike the results for amount sent, when analyzing proportions returned, we find no

significant condition x country interaction. The proportions returned across conditions and

countries are displayed in Figure VII. Interestingly, the clear demarcations in levels of trust that

we saw in the amount sent data do not seem to be translating into the same demarcations in

levels of reciprocity except among American subjects. Instead we see more constant drop-offs in

levels of reciprocation across conditions in the Asian countries.

22

-----------------------------------------Insert Figure VII about here-------------------------------------

The analysis across countries also yields significant differences in the distributions of

sender and responder wealth. The Tukey HSD test reveals k in Korea (k=.620), and China

(k=.434) to be significantly higher than k in Japan (k=.300) or in the United States (k=.277)

(p.<.05). Korean subjects are on average, splitting total earnings; in China the distribution is just

shy of a split of total return. In Japan and the US, the average sender received from the

responder slightly less than he sent. An examination of reciprocal responders reveals that in the

United States and Japan 17 and 18 out of 70 responders, (24% and 25% respectively), could be

classified as reciprocal. In China 30 of 64 responders (47%) were reciprocal, and in Korea 42 of

70 responders (60%) returned to senders more than was sent.

VIII. Discussion and Conclusion

Prior research has demonstrated the benefits of trust to groups and to societies. At the

aggregate level societies grow more prosperous [Knack and Keefer 1997], governments work

more efficiently [Putnam 1993], and groups achieve more cooperation and economic success

[Dawes 1980; Krugman 1995] because of the effects of trust in the presence of direct and

indirect reciprocation. In this research we studied the extent to which individuals trust under

conditions of both direct and indirect reciprocation. Our goal was to experimentally demonstrate

how trust and reciprocity changes when individuals trust for the benefit of a group or society as

opposed to trusting for their own benefit.

First, we find that across our conditions - the direct, group, and society conditions –

amounts sent and proportions returned significantly deviated from the equilibrium prediction.

23

Clearly, subjects were willing to trust and reciprocate, even to the potential benefit of someone

other than himself or herself. Thus we conclude that while trust is based on self-interested

calculativeness to some extent [Williamson 1993], we also agree with Rabin [1993] that the

actions of reciprocally motivated individuals produce outcomes that differ significantly from

those predicted by models of utility based purely on self-interest. Perhaps these actions are

motivated, as suggested by Sabel [1993], by trusting in a shared sense of community with a

common fate.

However, we also demonstrate significant declines in amounts sent and proportions

returned as reciprocity becomes more indirect. Specifically, subjects in the US trust and

reciprocate the most under conditions of direct reciprocity and less when the target of

reciprocation is a group member or a random person in (the experimental) society.

Our indirect reciprocity results are significant especially because they were demonstrated

under fairly subtle experimentally induced conditions. Subject identities remained anonymous

throughout the experiment, and subjects were told simply (through written instructions) that they

were members of a group for purposes of the experiment. The results of Glaeser et al. [1999]

also clearly demonstrated the influence of joint group membership on trust. In that research,

however, group membership was measured by characteristics such as the number of friends the

sender and responder had in common, being members of the same race, and the duration of their

acquaintanceship. The fact that social connection predicted the level of trust both in a situation

where it was based on real subject characteristics and also when it was based on an

experimentally constructed membership indicates the importance and power of group

membership in promoting trust.

24

Our second study investigates these questions in an international setting using subjects

from China, Japan and Korea. It is interesting that, contrary to the experience-in-free-trade

theory and Fukyama’s culture-based theory, both of which put China as the least trusting

country, Chinese subjects were both the most trusting and most reciprocal of any participants in

our study. This finding of high trust and cooperation among Chinese subjects replicates results

found in a variant of the trust game in Buchan, Johnson, and Croson [2000], and in a prisoners’

dilemma experiment in Buchan, Dickson, and Haytko [2000]. Additionally, although a lack of

available data on education and other variables prevented China from being included in the

cross-national trust research of Knack and Keefer [1997], the authors footnote that China’s score

of 60.3 percent on their trust scale was the highest score among thirty countries. This collection

of results seems to indicate that our understanding of why one country may be more trusting and

reciprocal than another is limited at best, and that more research is needed before we can

understand and predict the influence of national differences on trusting and reciprocal economic

behavior.

Having said that, our results concerning trust in Japan and the United States do agree with

the argument forwarded by Yamagishi and Yamagishi [1994] and by Hagen and Choe [1998]. In

this experiment, which contained no monitoring or sanctioning mechanisms to ensure

cooperation, trust was higher among American subjects than among Japanese subjects. It is

likely that deeper examination into social and psychologically-based explanations such as this

will yield insight into cross-national differences in trusting behavior.

The significant condition by country interaction in our results demonstrates not only the

difference in trusting behavior when reciprocity is direct versus indirect, but also that these

differences are country-specific. Thus the boundaries of trust differ across the four countries

25

studied depending on the linkage between the sender, the responder, and the target of potential

reciprocation. These results also suggest that the value of group membership may be higher in

some Asian countries than in the US. In Japan, for example, trust in the presence of indirect

(group) reciprocity was the same as trust in the presence of direct reciprocity.

One logical question arising from our findings, especially for those wanting to participate

in the global economy, is how to become perceived as a member of the group – particularly in

Japan where our results indicate much more trust and reciprocity in the group than in society.

An area for future research would be a cross-national study with participants from different

countries playing the trust game with each other. In doing so, we could explore whether the

boundaries of group trust and reciprocity are flexible enough to include in the group a member of

a different country. We would also be able to examine whether externally induced group

boundaries (as used in the present research) would be impetus enough to prompt trusting

behavior among players from different countries, or whether the type of social connection

suggested by Glaeser et al. [1999] is ultimately necessary to promote trust and reciprocation.

To put our results into perspective it is interesting to note the relationship between trust

and reciprocity across countries. Chinese subjects were both very trusting and very reciprocal,

while Japanese subjects were relatively much less trusting and much less reciprocal. The direct

relationship between trusting and reciprocal behavior in these two countries seems clear. In

contrast, American subjects were highly trusting, but had low levels of reciprocation, while

Korean subjects had low levels of trust, but high levels of reciprocation.

Finally, in the introduction of this paper we discussed the need for a link between our

understanding of trust and its impact on the individual versus our knowledge of trust and its

influence on society. We believe that this research begins to build that link. Across the four

26

countries studied, in the direct reciprocity condition 55 of 56 senders were trusting and sent

money to the responders. In 71% of those cases, the senders’ trust was reciprocated by the

responders. That is, in the direct reciprocity condition, 71% of senders ended up better off

(wealthier) than when they had begun as a result of their trust and their partner’s reciprocation.

Although the benefits of trust decrease as reciprocation becomes more indirect, our

results show that members of society still benefit from individual’s trust. One hundred and one

of 112 senders were trusting in the society condition, and 23% of senders benefited from that

trust and received back more than they had sent. These results show that people will trust to

benefit other members of society even in the absence of direct reciprocity, and as a result, a

significant portion of society ends up better off than they were.

27

*Assistant Professor of MarketingUniversity of Wisconsin – Madison4261 Grainger Hall975 University AvenueMadison, WI 53706-0394Phone: 608-263-7720Fax: 608-262-0394e-mail: HtmlResAnchor [email protected]

**Associate Professor of Operations and Information ManagementThe Wharton School, University of PennsylvaniaSteinberg Hall – Dietrich HallPhiladelphia, PA 19104-6377

*** The Charles J. Queenan, Jr. University Professor Dept. of Social & Decision Sciences Carnegie Mellon University Pittsburgh, PA 15213-3890

28

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Table I

Descriptive Statistics

Condition

Direct Group Society

Amount Sent (out of 1000)

782.14(219.79)

488.64(336.96)

505.46(357.90)

ProportionReturned

0.319(0.15)

0.114(0.129)

0.130(0.209)

32

Table II

Regression Analysis

Independent Variable Amn’t Sent Prop RetIntercept 699.40*** 0.227**Group -287.89*** -0.231**Society -262.24** -0.194**GenderEconomics educationAmount Sent

36.6526.52

0.0250.0420.0001**

Adjusted R2 .120 .375

Number of Observations 69 69

^ p<.10 * p<.05 ** p<.01

33

Table III

Descriptive Statistics Internationally

Amount Sent (Out of 1,000 Units)

Condition

Direct Group Society Mean

American 782.14(219.79)

488.64(336.96)

505.46(357.90)

554.07(341.92)

Chinese 728.57(246.29)

482.72(245.59)

477.17(347.28)

534.07(308.34)

Japanese 504.28(282.48)

508.83(289.98)

236.25(294.14)

398.89(315.73)

Korean 526.78(263.56)

443.25(264.63)

330.17(282.17)

414.72(278.26)

Mean 635.44(275.87)

480.75(285.47)

387.26(336.22)

474.15(310.86)

Proportion Returned

Condition

Direct Group Society Mean

American 0.319(0.15)

0.114(0.129)

0.130(0.209)

0.162(0.185)

Chinese 0.409(0.145)

0.265(0.203)

0.154(0.115)

0.248(0.183)

Japanese 0.249(0.179)

0.147(.130)

0.092(0.212)

0.146(0.183)

Korean 0.425(0.256)

0.236(0.153)

0.208(0.214)

0.263(0.215)

Mean 0.350(0.196)

0.187(0.163)

0.146(0.194)

0.200(0.191)

Standard deviations are given in ( ).

34

Table IV

Regression Analysis Internationally

Independent Variable Amn’t Sent Prop RetIntercept 782.14** 0.3194**Group -293.57** -0.2049**Society -276.68** -0.1887**China -53.57 0.1099^Japan -277.86** -0.0703Korea -255.36** 0.1103^Group x China 47.72 0.0611Group x Japan 298.13* 0.1036Group x Korea 221.30^ 0.0159Society x China 25.25 -0.0658Society x Japan 8.46 0.0322Society x KoreaGenderEconomics educationAmount Sent

80.07-62.4045.30

-0.02830.03810.00060.0001**

Adjusted R2 0.165 0.267Number of Observations 273 273

^ p<.10 * p<.05 ** p<.01

35

Figure I

Direct Condition

36

Figure II

Group Condition

YouProposer A Responder B

Experimenters

triple amount sent

This room Another room

YouProposer A Responder B

Experimenters

triple amount sent

Experimenters

triple amount sent


37

Figure III

Society Condition

YouProposer A

ResponderB

ResponderD


Experimenters

triple amount sent

triple amount sent

Proposer C

YouProposer A

ResponderB

ResponderD


Experimenters

triple amount sent

triple amount sent

Proposer C

38

Figure IV

Distribution of Amounts Sent and Proportions Returned

Experimenters

YouProposer A

ResponderB

ResponderD

OtherProposer

OtherProposer


triple amount sent

triple amount sent

Experimenters

YouProposer A

ResponderB

ResponderD

OtherProposer

OtherProposer


triple amount sent

triple amount sent

39

D i r e c t C o n d i t i o n ( N = 1 4 S e n d e r s , 1 4 R e s p o n d e r s )

01 0 02 0 03 0 0

4 0 05 0 0

6 0 07 0 0

8 0 09 0 0

1 0 0 0

Amount Sent

0 . 0 00 . 1 00 . 2 00 . 3 0

0 . 4 00 . 5 0

0 . 6 00 . 7 0

0 . 8 00 . 9 0

1 . 0 0

Proportion Returned

S e n t P r o p o r t i o n R e t u r n e d

G r o u p C o n d i t i o n ( N = 2 8 S e n d e r s , 2 8 R e s p o n d e r s )

0

1 0 0

2 0 0

3 0 0

4 0 0

5 0 0

6 0 0

7 0 0

8 0 0

9 0 0

1 0 0 0

Amount Sent

0 . 0 0

0 . 1 0

0 . 2 0

0 . 3 0

0 . 4 0

0 . 5 0

0 . 6 0

0 . 7 0

0 . 8 0

0 . 9 0

1 . 0 0

Proportion Returned


S o c i e t y C o n d i t i o n ( N = 2 8 S e n d e r s , 2 8 R e s p o n d e r s )

0

1 0 0

2 0 0

3 0 0

4 0 0

5 0 0

6 0 0

7 0 0

8 0 0

9 0 0

1 0 0 0

Amount Sent

0 . 0 0

0 . 1 0

0 . 2 0

0 . 3 0

0 . 4 0

0 . 5 0

0 . 6 0

0 . 7 0

0 . 8 0

0 . 9 0

1 . 0 0

Proportion Returned


40

Figure V

Distribution of Joint Earnings

D i r e c t C o n d i t i o n

0

5 0 0

1 0 0 0

1 5 0 0

2 0 0 0

2 5 0 0

3 0 0 0

3 5 0 0

4 0 0 0

0 5 0 0 1 0 0 0 1 5 0 0 2 0 0 0 2 5 0 0 3 0 0 0 3 5 0 0 4 0 0 0

P r o p o s e r e a r n i n g s

Responder earnings

N o p a y b a c k l i n e

S p l i t t o t a l r e t u r n l i n e

B r e a k e v e n l i n e

S p l i t t o t a l e a r n i n g s l i n e

G r o u p C o n d i t i o n

0

5 0 0

1 0 0 0

1 5 0 0

2 0 0 0

2 5 0 0

3 0 0 0

3 5 0 0

4 0 0 0

0 5 0 0 1 0 0 0 1 5 0 0 2 0 0 0 2 5 0 0 3 0 0 0 3 5 0 0 4 0 0 0


Responder earnings





S o c i e t y C o n d i t i o n

0

5 0 0

1 0 0 0

1 5 0 0

2 0 0 0

2 5 0 0

3 0 0 0

3 5 0 0

4 0 0 0

0 5 0 0 1 0 0 0 1 5 0 0 2 0 0 0 2 5 0 0 3 0 0 0 3 5 0 0 4 0 0 0


Responder earnings





41

Figure VI

Average Amount Sent

Overall and by National Group Across Conditions

0

200

400

600

800

1000

Overall Americans Chinese Japanese Koreans

Am

ount

Sen

t


42

Figure VII

Average Proportion Returned

Overall and by National Group Across Conditions

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Overall Americans Chinese Japanese Koreans

Pro

port

ion

Ret

urne

d


43

direct and indirect trust and reciprocity

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