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Abstract
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Before
In developing economies, commercial transactions frequently occur within the informal economy, with often surprising degrees of contractual complexity. By its nonlegal nature, informal contracts will rarely be enforced by Law, and hence contacts depend on inter-personal trust between contracting agents. Interpersonal trust can stem from different sources: education, culture, history, etc. We posit that interpersonal trust, mostly in what relates to commerce, depends on institutions, and that unofficial institutions regulating informal markets, such as merchant’s associations, can be a source of trust. In context of extreme degrees of informality in the economy, and of weak official institutions, such as in Bolivia, inter-personal trust might emanate more form unofficial than from official sources.
This experiment intends to measure interpersonal trust based upon Berg’s experiment (1995), in which the game is slightly modified by allowing trustors to object the result of the game by appealing to and arbitrage institution. The arbitrage institution is randomly allocated to the players as an official institution (a court of justice) or an unofficial one (a merchants’ association). We hypothesize that in the Bolivian context, unofficial institutions are more conductive to improved levels of interpersonal trust.
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After
In developing economies, commercial transactions frequently occur within the informal economy, with often surprising degrees of contractual complexity. By its non-legal nature, informal contracts will rarely be enforced by Law, hence contacts depend on inter-personal trust and reputation between contracting agents. Interpersonal trust can stem from different sources: education, culture, history, etc. We posit that interpersonal trust, mostly in what relates to commerce, depends on institutions, formal and informal. In the context of extreme degrees of informality in the economy, and in the presence of weak official institutions, such as in Bolivia, inter-personal trust might emanate more from unofficial than from official sources.
This experiment intends to measure interpersonal trust based upon Berg’s experiment (1995), in which the game is slightly modified by allowing players to build up trust aided by the presence of four types of institutions. In a repeated and finite game, the situation is framed as an investment game in which trustors can invest in a business opportunity with a randomly matched entrepreneur (the trustee). The entrepreneur can choose how much to reimburse the investor, which may be less than the initial investment. The randomly assigned institutions can (i) punish low reimbursements (formal institution), (ii) punish low reimbursements but with some low probability (formal imperfect institution), (iii) inform the investor on the reimbursement history of the matched entrepreneur (reputation as an informal institution), and (iv) inform the entrepreneur of the previous aggregate behavior of the group of entrepreneurs (social norm as an informal institution). We hypothesize that while the formal punitive institution should be conducive to larger investments, imperfect formal institutions might be as effective or less than informal institutions in building up trust.
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Last Published
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February 03, 2021 07:02 AM
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November 03, 2021 04:49 AM
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Intervention (Public)
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Before
We plan to implement a lab-in-the-field trust experiment. Merchants and workers from informal commercial zones in La Paz (Bolivia) will be invited to play a modified version of the investment game (Berg et al 1995), i.e. they will be separated in two groups and one of them will be asked to give money or "invest in" the other at the promise they will return the investment with interests. We will use a factorial design with two treatment arms. The first treatment arm consists of revealing beforehand investors cannot appeal at all or can appeal to one of two institutions - formal or informal - if they believe investment returns were unfair. The second treatment arm models a “lax” or “severe” payment structure: appealing the results of the game can be either costly with high compensation, or cheap with low compensation. We test whether interpersonal trust changes by introducing each of these institutions and rules and comparing them. Then, we collect data on participants ’perceptions, risk aversion, loss aversion and local associations characteristics to explore if variables such as organizational capacity, the reputation of fair ruling and proximity are correlated with treatment effects.
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After
We plan to implement a lab-in-the-field trust experiment. Merchants and workers from informal commercial zones in La Paz (Bolivia) will be invited to play a modified version of the investment game (Berg et al 1995), i.e. they will be separated into two groups; players in the first group will be asked to give money or "invest in" the other group in the hopes that players in the second group will return the investment with interests. In the framing of the game, we will call players from the first group "investors", and players from the second group "entrepreneurs". The game lasts 12 rounds with three additional practice rounds. In each round, an investor is randomly matched with an entrepreneur.
We use a between-subject design, assigning participants to one treatment only. However, we exploit within-subject variation by using the first four rounds in the game to establish a baseline of interpersonal trust. In these rounds, no innovation is introduced. From round five on, we introduce four treatments in the form of an institutional arrangement to explore if it is conducive to increased levels of trust and investment:
(T1: SN) Social Norm - taken as an informal institution, participants are informed of how many entrepreneurs reimburse less than the investment in the previous round. This information creates incentives to conform to a social norm.
(T2: PR) Personal reputation - taken as an informal institution, investors are informed of the history of repayments by the entrepreneur with whom they are matched at each round, providing an opportunity for the entrepreneur to build up a favorable reputation.
(T3: II) Imperfect institution- taken as a formal institution albeit dysfunctional, participants are told that if entrepreneurs reimburse less than what has been invested in any round, they might be punished with a certain probability. If punished, they will only receive the show-up fee at the end of the game. The probability of being punished rises by five percent increments each round in which reimbursement has been lower than investment.
(T4: PI) Perfect institution - taken as a formal institution, participants are told that if an entrepreneur reimburses less than what has been invested in at least one round, then he o she will be punished and will only receive the show-up fee at the end of the game.
Then, we collect data on participants' perceptions, risk aversion, trust in government and institutions, membership to merchant's and patronal associations, etc. to explore if variables such as organizational capacity, the reputation of the State, and culture are correlated with treatment effects.
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Primary Outcomes (End Points)
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Before
interpersonal trust derived from trust in institutions
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interpersonal trust derived from different institutions
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Experimental Design (Public)
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Before
The experiment builds on the trust game designed by Berg et al. (1995), which will be implemented as a framed field experiment with an institutional variation treatment. This means we intend to implement the game in the natural working space of our study subjects: spaces available in merchants’ market zones. The experiment has a 3x2 between-subject factorial design. For the first treatment arm, we use the experiment of Berg et al. (1995) as a baseline treatment and then we test whether giving the opportunity to appeal the results of the game to a particular institution increases or decreases the level of trust, measured by the amount sent by the trustor. The institution can be formal, i.e. a commercial court, or informal, i.e. “tribunals of honor”. For the second treatment arm, we institute a “severe” and a “lax” treatment : appealing the results of the game can be either costly with a high compensation in case of a favorable ruling for the plaintiff, or cheap with a low compensation in case of a favorable ruling for the plaintiff. So, our experiment has five treatments in total: a control group, an informal institution with severe rulers, an informal institution with lax rules, a formal institution with severe rules and a formal institution with lax rules.
Our experimental procedure has two parts. First, subjects are submitted to specific rooms (room A and B) to play the modified trust game with institutions. Then, they are asked to fill out a small questionnaire after the experiment.
We consider Berg et al. (1995)’s trust game with initial endowments as baseline treatment, where two groups of agents are sent to two different rooms: A and B. The game proceeds as follows:
1. Subjects from room A (trustors) are given an amount Rwhereas subjects from room B (trustees) receive an amount S. Both subjects know each is receiving some amount of money at the beginning.
2. Subjects in A choose to send some, nothing or everything of it to subjects in room B (trustees).
3. We triple whatever amount subjects A sent and deliver it to subjects in room B.
4. Subjects in B choose to send: some, nothing or everything of the money they received from A.
The idea of giving an initial endowment to both players is to reduce the effect of aversion to inequality (Calabuig et. al. 2016).
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After
The experiment is based upon Joyce Berg’s "investment game” (1995). An even set of subjects is randomly allocated to two rooms, A and B, half of the group in each. Each session requires six, eight, or ten subjects. Each subject is allocated a tablet, a set of printed instructions, some paper, and a pencil. Subjects cannot communicate with each other. During the experiment, subjects in room A will be framed as “investors”, and agents in room B “entrepreneurs”. Sanitary precautions will be taken in consideration of the pandemic, including the use of surgical masks, hand sanitizer, room ventilation, and social distancing. Tablets and desks will be sanitized before each new game, and paper will be properly discraded.
The game has a duration of twelve rounds. Four rounds are control rounds, and the last eight rounds are treatment rounds. Before starting the game, three practice rounds take place. Each subject will have a constant endowment per round of 40 bolivianos ($us 5.80), so that we can prevent effects related to inequality aversion. At the beginning of each round, each investor is randomly and anonymously paired with an entrepreneur. Each investor can invest any amount, including zero, from her 40 bolivianos in multiples of five, by sending them to the paired entrepreneur. Upon receiving it, the investment sent to the entrepreneur is multiplied by three. Hence, the maximum amount that can be received by the entrepreneur is 120 bolivianos. The entrepreneur can then choose to send back to the investor any amount from the resulting gains, again in multiples of five. Once the entrepreneur decides the amount to send back, the round ends. This procedure is repeated in the remaining rounds.
Before the treatments start, some general rules are laid out and are enforced by the experimenter. The main rules are:
• Pairs are anonymous, meaning that investors do not know with which entrepreneurs they are randomly matched.
• Players have no information on the preceding behavior of the group or of specific individuals
• The experimenter does not intervene or regulate the actions of the players beyond defining the strategy space and explaining the rules
• The experimenter guarantees the fulfillment of each agent’s payment. Payments correspond to the outcome of a randomly selected round using a fair twelve-sided die.
During the experiment, we intend to identify ways to increase investment and retribution by exposing the agents to different sets of rules, i.e. different institutions, which will vary the information available and the expected payoffs. We use a between-subject design, assigning participants to one treatment only. However, we exploit within-subject variation by using the first four rounds in the game to establish a baseline of interpersonal trust. In these rounds, no innovation is introduced and all participants in a group start with the setting described previously. From round 5 on, participants are assigned randomly to one of four treatments. The treatments are as follows.
Treatment 1 (Social Reputation): Starting at round five and for each following round, participants are informed of how many entrepreneurs reimburse less than the investment in the previous round. This information intends to create incentives to conform to a social norm.
Treatment 2 (Individual Reputation): Starting at round five and for each following round, investors are informed of the history of repayments by the entrepreneur with whom they are matched at each round, providing an opportunity for the entrepreneur to build up a favorable reputation.
Treatment 3 (Imperfect institution): Starting at round five and for each following round, participants are told that if entrepreneurs reimburse less than what has been invested in any round, they might be punished with a certain probability. If punished, they will only receive the show-up fee at the end of the game. Participants are issued a warning at the end of the round. The warning states that the experimenter has been notified of the scam and that there is a 5% chance that the entrepreneur will only receive the show-up fee at the end of the game, excluding therefore any gains made during the game. For each additional “scam” move, there is an additional 5% chance of facing charges, therefore a maximum of 40% probability of being sanctioned if she scams at every treatment round. The investor is informed of these rules.
Treatment 4 (Perfect Institution): Starting at round five and for each following round, participants are told that if an entrepreneur reimburses less than what has been invested in at least one round, then he o she will be punished and will only receive the show-up fee at the end of the game.
Concerning the implementation of the experiment, it will be programmed using Google sheets, benefiting from the cloud computing possibilities which allows the use of tablets in a mobile lab, facilitating sanitary precautions (papers are not exchanged, the set-up and duration of the sessions are relatively short), and can permit a sufficiently simple and familiar interface to accommodate the sampled population.
The experiment will be conducted at the facilities of Universidad Privada de El Alto, a public university located near informal commercial zones in the city of El Alto and in the facilities of Universidad Privada Boliviana in La Paz. Recruitment will be made in different popular markets, informal trading zones, and small businesses of the cities of La Paz and El Alto. Inside the university buildings, we will adequate two classrooms to conduct the experiment and participants will be distributed in such a way that they won’t be able to see the strategies of one another. A bio-safety protocol will be implemented and all material should be prepared well in advance and ready to start fieldwork as soon as contagion rates are sufficiently low.
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Randomization Method
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Randomization will be done in site by a computer
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Randomization is done in the office by a computer. We use block randomization by day-of-the-week. Each day, we plan to implement four sessions, and treatments are randomly assigned to one of them. The probability of selecting a treatment depends on the treatment. Treatments 2, 3, and 4 are equally probable, but we assigned a higher probability of selection to treatment 1 (social norms), based on the sample design.
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Randomization Unit
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Market merchants of the North Zone of La Paz city, Bolivia.
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Experimental session
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Was the treatment clustered?
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No
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Yes
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Planned Number of Clusters
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N/A
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45 experimental sessions
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Planned Number of Observations
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400 individuals
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450 individuals (merchants from La Paz and El Alto)
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Sample size (or number of clusters) by treatment arms
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80 individuals per treatment
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15 sessions of treatment 1
10 sessions of treatments 2, 3 and 4
45 sessions in total
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Power calculation: Minimum Detectable Effect Size for Main Outcomes
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0.25 SD for each treatment.
0.95 Confidence level
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Details of power calculation for average treatment effect on interpersonal trust:
Baseline mean value of amount sent to entrepreneurs (Y): 20 Bs (50% of total amount available)
Standard deviation of Y: 3.16 Bs.
Minimum detectable effect: 0.5 SD
Confidence level: 95%
Power: 80%
ICC: 0.3
We allow for heterogeneous effects in treatment 1 (social norms). Effects range: (0.36,0.64)
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Keyword(s)
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Other
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Other
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Secondary Outcomes (End Points)
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trustworthiness
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Secondary Outcomes (Explanation)
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Trustworthiness is measured by the amount the entrepreneur or trustee returns to the investor, as in Berg et al. (1995)
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Building on Existing Work
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No
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