An experimental study of information mechanisms in the trust game: effects of observation and cheap talk

We use a human–subjects experiment to test the effects of non–coercive “information” mechanisms designed to increase cooperation and efficiency in the trust game. In the equilibrium of the standard trust game, the investor does not invest, foreseeing that the allocator would have kept all of the returns from investment. Our mechanisms add a pre–play stage in which the investor receives information, which can take the form of either a cheap–talk message from the allocator or observation of the allocator’s previous allocation decision. Also, one treatment allows both observation and cheap talk, making a direct comparison of these devices possible. None of our mechanisms alter the game’s predictions in theory. We find that observation results in substantially higher cooperation and efficiency, but cheap talk has little effect. Journal of Economic Literature classifications: C72, D82, A13.