Enhancing Human Economic Performance

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Field observations have established the ubiquity of mutually beneficial, reciprocity based economic behavior, and experimental research has demonstrated that such behavior is robust to controlled laboratory environments. Unfortunately, non-cooperative behavior founded in individual self-interest can corrupt trust-based exchange. Consequently, humans continually face the problem of finding credible procedures to commit to reciprocal, mutually beneficial exchanges. An important question is what kinds of social institutions enhance trust-based exchange. The project examines the implications of trust relationships for market performancein both personal and impersonal exchange settings. In these experiments, two treatments are considered in each of two contracting institutions. The first institution, bilateral bargaining, is relatively personal. The second institution, a double auction, is more impersonal and involves multilateral negotiation rules that allow buying and selling through a publicly observed bid-ask spread. The two treatments are manual contract execution, where a subject must choose to complete their contract, and automatic execution, where contracts are executed immediately through the experimental software. The goal is to investigate whether and how breakdowns in trust relationships can lead to market failure, and whether this failure is related to contracting institutions.Over the last ten years laboratory experiments, informed by the work of game theorists, experimental economists, economic historians, evolutionary psychologists, and sociologists, have helped to develop theories that take account of the ecological rationality of economic behavior; and particularly the way incentives have changed as humans moved from small group personal exchange to large group impersonal exchange. This proposal describes a number of new experiments that examine how the way in which human performance in markets can fail during a transition to impersonal exchange.Understanding how human economic performance relies on trust relationships, and finding procedures that help to facilitate and sustain this trust-based performance, is increasingly important to society at large. One important reason is that online markets are expected by many to be an engine of economic growth over the next few decades, but as the research suggested herein will make clear, these markets can potentially fail because of failures of trust. In particular, buyers and sellers in online markets must transact with counterparts about whom they know very little, and, for example, an untrustworthy buyer might not deliver payment, or an untrustworthy seller might not deliver an expected product. These possibilities are real: complaints relating to online markets accounted for 78 percent of all Internet fraud complaints received by the National Consumers League in 2000. Research presented in this proposal represents a step towards better understanding the link between human performance in markets and trust, and provides insights on how to design market institutions that help to prevent market failures due to trust failures, and that consequently act as catalysts for future economic growth.