Competition fosters trust

We study the effects of reputation and competition in a trust game. If trustees are anonymous, outcomes are poor: trustees are not trustworthy, and trustors do not trust. If trustees are identifiable and can, hence, build a reputation, efficiency quadruples but is still at only a third of the first best. Adding more information by granting trustors access to all trusteesʼ complete history has, somewhat surprisingly, no effect. On the other hand, we find that competition, coupled with some minimal information, eliminates the trust problem almost completely. ► We study the effects of reputation and competition in trust games. ► Under competition trustors can choose trustees. ► In the absence of reputation and competition, the inefficient Nash equilibrium predicts behavior extremely well. ► Reputation increases efficiency from close to zero to 30%. Coupled with competition efficiency reaches over 80%.