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THREE-PLAYER TRUST GAME WITH INSIDER COMMUNICATION

Authors

  • ROMAN M. SHEREMETA,

    1. Sheremeta: Assistant Professor, Argyros School of Business and Economics, Chapman University, One University Drive, Orange, CA 92866. Phone +1-714-744-7604, Fax +1-714-532-6081, E-mail sheremet@chapman.edu
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  • JINGJING ZHANG

    1. Zhang: Assistant Professor, Chair for Organizational Design, Department of Economics, University of Zurich, CH-8006 Zürich, Switzerland. Phone +41-44-634-3743, Fax +41-44-634-4907, E-mail jingjing.zhang@uzh.ch
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    • The earlier version of this paper circulated under the title “Multi-Level Trust Game with ‘Insider’ Communication.” We thank the associate editors and two anonymous referees for helpful comments in revising the manuscript. We also thank Tim Cason, John Dickhaut, Jerry Hurley, Luke Lindsay Stuart Mestelman, Mohamed Shehata, Anya Savikhin, seminar participants at Purdue University, and participants at the Economic Science Association meeting for helpful discussions and comments. This research has been supported by the National Science Foundation (SES-0721019). J.Z. gratefully acknowledges financial support from the European Research Council (ERC Advanced Investigator Grant, ESEI-249433) and Swiss National Science Foundation (SNSF-135135). We alone are responsible for any errors.


Abstract

We examine behavior in a three-player trust game in which the first player may invest in the second and the second may invest in the third. Any amount sent from one player to the next is tripled. The third player decides the final allocation among three players. The baseline treatment with no communication shows that the first and second players send significant amounts and the third player reciprocates. Allowing insider communication between the second and the third players increases cooperation between these two. Interestingly, there is an external effect of insider communication: the first player who is outside communication sends 54% more and receives 289% more than in the baseline treatment. As a result, insider communication increases efficiency from 44% to 68%. (JEL C72, C91, D72)

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