Reciprocity and the Paradox of Trust in psychological game theory

Isoni, Andrea;Sugden, Robert

2019-01-01

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Abstract

Rabin's psychological game-theoretic model of ‘fairness’ has been the starting point for a literature about preferences for reciprocity. In this literature, reciprocity is modelled by defining an individual's ‘kindness’ or ‘unkindness’ in terms of the consequences of his actions for others, and assuming a motivation to reward (punish) other people's kindness (unkindness). Contrary to intuition, this form of reciprocity cannot explain mutually beneficial trust and trustworthiness in a simple Trust Game. We formalise and offer a diagnosis of this ‘Paradox of Trust’. We distinguish between two kinds of reciprocity. Rabin's concept of reciprocal kindness is a psychologically plausible motivation, and the paradox is an informative result about the implications of this motivation. However, trust is better understood in terms of reciprocal cooperation – the motivation to play one's part in mutually beneficial practices, conditional on others playing their parts. We show that a theory of reciprocal cooperation can avoid the paradox.