Trust, Reciprocity and Institutional Design: Lessons from Behavioural Economics

Pelligra V¹*

1. Department of Economics, University of Cagliari, Cagliari, Italy

Trust and reciprocity are the bond of society (Locke), but economic agent are both self-interested and intrinsically untrustworthy. How, then, can economics account for social relationships? The paper examines strategies to escape this paradox by enlarging our conception of rationality: the assumptions of self-interest and consequentialism are critically discussed and relational principles such as trust and reciprocity are formally incorporated.

The implications of this enlarged kind of rationality are particularly important for agency theory. The paper analyses, within this framework, the working two different kinds of incentive mechanisms, namely, intra-personal and inter-personal and presents results of an experiment that emphasize the empirical relevance of the latter.

Besides providing a more descriptively adequate picture of agency and strategic decision-making, such mechanisms have important normative implications. In this respect some of the conditions that affect the process of accumulation and erosion of trust are explored. The tension between rules and trust turns out to be not inescapable, though it calls for a changing in the designing logic of institutions and contracts. We shall discuss what are the changes needed in order to implement a trust-enhancing activity of institutional design.

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