A Theory of Reciprocity with Trust
People are reciprocal if they reward kind actions and punish unkind ones. I propose a new theory of intention-based reciprocity that addresses the question of when a mutually beneficial action is kind. When both benefit from the action, a player's motive is unclear: he may be perceived as kind for improving the other player's payoff, or as self-interested, and not-kind, for improving his own. I use trust as an intuitive mechanism to solve this ambiguity. Whenever a player puts himself in a vulnerable position by taking such an action, he can be perceived as kind. In contrast, if this action makes him better off than his alternative actions do, even if it is met by the most selfish response, he cannot be kind. My model explains why papers in the literature fail to find (much) positive reciprocity when players can reward and punish. In particular, I show how negative reciprocity crowds out positive reciprocity. By allowing for interactions between rewards and punishments, my model provides a theoretical framework to analyze institutional design and incentive structures when people are motivated by reciprocity.
The Benefits of Being Misinformed
In the spirit of Blackwell (1951), we analyze how two fundamental mistakes in information processing - incorrect beliefs about the world and misperception of information - affect the expected utility ranking of information experiments. We explore their individual and combined influence on welfare and provide necessary and sufficient conditions when mistakes alter and possibly reverse the ranking of information experiments. Both mistakes by themselves reduce welfare in a model where payoff relevant actions also generate informative signals. This is true for naive decision-makers, unaware of any errors, as well as for sophisticated decision-makers, who account for the possibility of mistakes. However, mistakes can interact in non-obvious ways and an agent might be better off suffering from both, rather than just one. We provide a characterization when such positive interactions are possible. Surprisingly, this holds true only for naive decision-makers and thus naivete can be beneficial. We discuss implications for information acquisition and avoidance, welfare-improving belief manipulation, and policy interventions in general.
More Research in Progress
Costly Information and Control
with Rafael Hortala-Vallve, Aniol Llorente-Saguer and Valentino Larcinese
Sequential Reciprocity and Incomplete Information