Contracts versus Trust in Water Allocation: Growing & Sharing the Pie in Northeast Brazil

"We explore the efficiency and equity resulting from allocation of a fixed resource within a bargaining institution, using a modification of the Ultimatum Game with asymmetric productivity and a surplus-sharing step that permits us to explore trust. Sharing allows pie division independent of pie growth. We use generically framed experiments based on water allocation in NE Brazil with 570 participants in Ceara, in Fortaleza (the capitol) or the Jaguaribe (largest agricultural) Valley. These areas are soon to be further connected by a large canal to bring water towards Fortaleza. Our games have 3 steps: [1] proposers request a resource amount; [2] responders accept that split or reject it, yielding a low default payment for all; and [3] if that proposal was accepted, proposers choose whether to send back some of the gains. We consider three institutional designs distinguished by levels of communication. In 'No Communication', a benchmark, and in 'Message' where the proposer sends a non-binding written message about 3rd-step sharing conditional upon acceptance, we see evidence of 2nd-step trust (acceptance of less than the default) that pays off. Yet when that sharing message is a binding 'Contract', efficiency and equity rise."