Economic Engineering of Trust

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Most economic engineering deals with centralized systems (e.g., auction and matching markets). The focus of the present research project, however, is the design of decentralized markets. Good designs encourage the revelation of private information necessary to efficient trading, and also promote voluntary cooperation and trust. Along with material incentives, these designs need also take into account social motivations and limited cognition. More specifically, we focus on informational deficits that create moral hazard and adverse selection problems. Thus, trust and trustworthiness are crucial for the market to function effectively. Among other things, by utilizing theory, field data and laboratory experiments, we have shown in the first funding period why advice (including reputation information) is distorted in financial and Internet markets, and how institutions can be engineered to mitigate such distortions and to promote trust. Based on our previous findings, we plan to extend our research in Part A by not only assuming an informed advisor (seller) but also an informed advisee (buyer). For instance, we plan to utilize a household survey to explore interactions of advice and (mis)informed financial decisions. We also plan to study advisor behavior facing informed advisees, the results of which will have repercussions for policy that intends both to make consumers’ access to information easier and to allow consumers to validate recommendations. Our laboratory studies in Part A will include an investigation of the endogenous generation of information through a costly effort. Similarly, in Part B, while one focus will continue to be the design of reputation systems in large markets to reveal useful information (utilizing a data set from eBay), we will complementarily investigate conflict resolution systems and negotiation procedures to promote trust and cooperation. Given that our research revealed significant difficulties with feedback systems, it is perhaps not surprising that such complementary measures are increasingly used in practice − although their performance and interaction with boundedly rational trading is, so far, poorly understood. In particular, negotiations take place on almost all steps of interaction in market transactions, and are thus decisive when it comes to engineering trust. However, economic standard theory does not deliver a satisfactory picture of negotiations in real-world contexts, in particular, when plagued by context-specific asymmetries and multiple focal points. We aim to help filling these gaps in the literature.