Social Norms and Trust among Strangers

We study the development of a social norm of trust and reciprocity among strangers in the infinitely repeated binary trust games. Players are anonymous and interact at randomly determined times. Following Kandori (1992), we show that the social norm of trust and reciprocity can be sustained in a sequential equilibrium when self-interested community members employ the contagious strategy. In order to provide the investors with proper incentives to follow the contagious strategy, the sufficient condition requires that there should exist an outside option for the investors and the payoff from the outside option should converge to the payoff from trust and reciprocity when the community size goes to infinity. We further show that this sufficient condition is also a necessary condition to sustain any sequential equilibrium in which the trustees employ the contagious strategy. Our results imply that the extension of the contagious equilibrium from the Prisoner's dilemma game to other classes of games such as trust game is very limited.