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House money effects on trust and reciprocity

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Abstract

In a typical laboratory “Investment Game” experiment, participants’ endowments are provided by the experimenter; thus, the worst case for the investor is that she loses all of her “found” money. By contrast, in naturally occurring environments, investment decisions can often lead to a loss of one’s own money. This paper investigates whether “trust” found in one-shot anonymous laboratory interaction is robust to “own money” environments. Our results show that, consistent with previous investment game results, most investors send a positive amount, and most trustees return at least the transfer amount, regardless of whether the investors purchase or are gifted their endowment. However, investments are on average lower when participants use their own money, and the fraction of maximum investments (the most “risky” investment decision) is only half as large under “own money” as it is under gifted endowments. Our results explain why one should exercise caution in placing trust in any government’s ability to spend other people’s money prudently.

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Notes

  1. Cox (2004) designs a triadic game to disentangle the motivations of investors and trustees in the trust game. He finds significant trusting behavior in the investment game in addition to unconditional other-regarding preferences. He also finds that both inequality-aversion and positive reciprocity account for trustees’ return behavior (for related work, see also McCabe et al. 2003; Charness 2004).

  2. The problem raised by the dilemma is simply that if both parties make the same decision, they are better off if it is “don’t squeal” than if it is “squeal” (Tullock 1967, p. 229).

  3. “I may have the most perfect confidence that my fellow criminal will never confess without in any way affecting my desirability of confessing” (Tullock 1967, p. 229).

  4. The RMB/US$ exchange rate was at the time about 7.6:1. Thus, Ұ25 = $3.29. Note that the average cost of lunch for students in the university cafeteria is about RMBҰ5-Ұ6.

  5. The transfer and the back transfer amount are restricted to be multiples of five owing to the fact that we conducted the experiment using Ұ5 bills as described below.

  6. A reason for high trust among Chinese people might be found in Koford (1998), who argued that high levels of trust among Bulgarian people (70 % sent on average) might be connected to low levels of trust in their government (also see Lee and Clark, 2001).

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Acknowledgments

We thank the editor Edward Lopez for valuable comments that improved this manuscript. We are grateful to Xiangdon Qin at Shanghai Jiaotong University for providing substantial assistance that facilitated our conducting these experiments.

Author information

Authors and Affiliations

  1. Economics Department and Interdisciplinary Center for Economic Science, George Mason University, 4400 University Dr, MSN 1B2, Fairfax, VA, 22030, USA

    Daniel Houser

  2. Department of Economics, Monash University, Clayton, VIC, 3800, Australia

    Erte Xiao

Authors
  1. Daniel Houser
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  2. Erte Xiao
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Corresponding author

Correspondence to Daniel Houser.

Appendix: Sample of Instructions (translated from Chinese version)

Appendix: Sample of Instructions (translated from Chinese version)

1.1 Own money treatment (Investor)

1.1.1 You are actor A

Description of your decision problem

Thank you for coming! You’ve earned Ұ20 for showing up on time. This Ұ20 will be paid to you at the end of the experiment. From the instructions, you can know how to make your decisions in the experiment and how to calculate the payoffs of your decisions. So please read these instructions carefully! There is no talking at any time during this experiment. If you have a question please raise your hand, and an experimenter will assist you.

We have randomly selected an experimenter observer from participants. The experiment observer will observe the whole experiment to make sure that the experiment procedure strictly follows the instructions. For the privacy of your decisions, the experiment observer will not be able to know exactly which decision is made by which participant.

You are in Room A and you will be randomly matched with someone in B Room (Actor B). You will never be informed of the identity of this person, either during or after the experiment. Similarly, your matched participant will never be informed about your identity. You and Actor B will participate only once in this decision problem.

This is how the experiment works.

1.2 Participation cash

Each participant (Actor A and Actor B) has put Ұ25 cash she brought into a paperbag. You can use the Ұ25 to participate following experiment.

(In the house-money treatment: Each participant (Actor A and Actor B) has been given Ұ25 cash and has put the cash into a paperbag. You can use the Ұ25 to participate following experiment.)

1.2.1 The decision of Actor A(You)

You, as Actor A, can transfer some amount of your Ұ25 participation cash to your paired Actor B. The transfer amount can be any multipliers of five between Ұ0 and Ұ25 (including Ұ0 and Ұ25), i.e., Ұ0,Ұ5,Ұ10,Ұ15,Ұ20,Ұ25. The experimenters will triple this transferred amount, so that Actor B receives three times any amount you transferred.

For example:

  • If you transferred Ұ0 to Actor B, Actor B will get Ұ0 *3 = Ұ0

  • If you transferred Ұ10 to Actor B, Actor B will get Ұ10*3 = Ұ30

  • If you transferred Ұ25 to Actor B, Actor B will get Ұ25*3 = Ұ75

After your decision, Actor B will decide to transfer back to you (Actor A) some amount of the tripled transfer amount he/she got (not her own Ұ25). (In the house money treatment: (not the Ұ25 she was given at the beginning)).The amount Actor B transfer back to Actor A can be any multipliers of five between 0 and the tripled transfer amount (including 0 and tripled transfer amount).

For example:

  • If you transferred Ұ5 to Actor B, Actor B will get Ұ5*3 = Ұ15. Actor B then can transfer back to Actor A Ұ0,Ұ5,Ұ10 or Ұ15.

1.2.2 How are payoffs of the decisions decided

Your (Actor A’s) payoff = Back-transfer from Actor B—Your Transfer to Actor B.

Actor B’s payoff = 3*Transfer from You—Back-transfer to You.

In the house money treatment:

Your (Actor A) payoff = Ұ25 + Back-transfer from Actor B—Your Transfer to Actor B.

Actor B’s payoff = Ұ25 + 3*Transfer from You—Back-transfer to You.

1.2.3 Experiment procedure

There are several envelopes in Room A and Room B. In each envelope in each room, there is a tag marked with a letter. Everyone in both Room A and Room B will randomly draw an envelope. The person in Room B who drew the same letter as yours will be your Actor B.

1.2.3.1 List of items

Items on your table: Your paper bag(inside the bag there are one blank envelope and Ұ25 bills you put at the beginning); one decision sheet.

Items on Actor B’s table: His/her paper bag (inside the bag there are Ұ25 bills he/she put at the beginning).

In the house money treatment:

  • Items on your table: Your paper bag (inside the bag there are one blank envelope and Ұ25 bills you were given at the beginning); one decision sheet.

  • Items on Actor B’s table: His/her paper bag (inside the bag there are Ұ25 bills he/she was given at the beginning).

1.2.3.2 The procedure of your (Actor A’s) decision

Please fill in the decision sheet the amount you want to transfer and also write the letter of your tag on the back of the decision sheet. Then please put the transfer amount into the envelope in the paperbag. To guarantee the privacy of your decision, please make the transfer inside of your paperbag. Please take out the envelope after you confirm the transfer amount in the papgebag. Meanwhile, please put your decision sheet into the envelope. After you finish this, please raise your hand. The experimenter will go to your seat, and, after making sure that all the necessary information is on the decision sheet, the experimenter will take your envelope.

After collected all the envelopes of Actor As, the experimenter will triple the transfer amount in each envelope and put these tripled transfer amount of money with the decision sheet into the corresponding envelope. The experiment observer will make sure that the amount of money the experimenter puts into the envelope is the tripled transfer amount indicated on the decision sheet. Then the experimenter will bring all the envelopes to classroom B.

1.2.3.3 The procedure of Actor B’s decision

Each Actor B will get her Actor A’s envelop according to the letter on her tag. Each Actor B will take out the decision sheet and put the envelope with the tripled transfer amount of bills into the paper bag. Similarly, to guarantee the privacy of Actor B’s decision, he/she will write down on the decision sheet the amount he/she wants to transfer back to the Actor A. Then, in the paperbag, she will put this amount of the money in the envelope. Actor B will also put the decision sheet into the envelope. After Actor B will raise her hand after finishing these, the experimenter will go to her seat and take the envelope after making sure that all the necessary information is on the decision sheets.

After collecting all the envelopes, the experimenter will return to classroom A. The experimenter will return each of you the corresponding envelope. You will see the back transfer from your Actor B. Please take out all your cash in the paperbag and the envelope. Please leave all the other experiment supplies on the desk. The experiment will first let Actor As leave A Room. After all the Actor As have left the lab, the experimenter will let Actor Bs leave B Room. The experiment is then finished.

Throughout this experiment, you won’t meet any Actor B in classroom B.

End of instructions

Please raise your hand to indicate that you are finished reading these instructions. When you do, an experimenter will give you an exercise sheet to ensure that you understand how you make decisions.

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Houser, D., Xiao, E. House money effects on trust and reciprocity. Public Choice 163, 187–199 (2015). https://doi.org/10.1007/s11127-014-0218-7

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