Intermediaries in Trust: Indirect Reciprocity, Incentives, and Norms

Abstract

Any trust situation involves a certain amount of risk for trustors that trustees could abuse. In some cases, intermediaries exist who play a crucial role in the exchange by providing reputational information. To examine under what conditions intermediary opinion could have a positive impact on cooperation, we designed two experiments based on a modified version of the investment game where intermediaries rated the behaviour of trustees under various incentive schemes and different role structures. We found that intermediaries can increase trust if there is room for indirect reciprocity between the involved parties. We also found that the effect of monetary incentives and social norms cannot be clearly separable in these situations. If properly designed, monetary incentives for intermediaries can have a positive effect. On the one hand, when intermediary rewards are aligned with the trustor’s interest, investments and returns tend to increase. On the other hand, fixed monetary incentives perform less than any other incentive schemes and endogenous social norms in ensuring trust and fairness. These findings should make us reconsider the mantra of incentivization of social and public conventional policy.