Building Trust One Gift at a Time

This paper reports an experiment evaluating the effect of gift giving on building trust in a relationship. We have nested our explorations in the standard version of the investment game. Our gift treatment includes a dictator stage in which the trustee decides whether to give a gift to the trustor before both of them proceed to play the investment game. We observe that in such case the majority of trustees offer their endowment to trustors. Consequently, receiving a gift significantly increases the amounts sent by trustors when controlling for the differences in payoffs created by it. Trustees are, however, not better off by giving a gift as the increase in the amount sent by trustors is not large enough to offset the trustees’ loss associated with the cost of giving a gift. Our results indicate that a relationship which is initiated by gift giving leads to higher trust and efficiency but at the same time is probably not stable.


Introduction
The majority, if not all, economic interactions rely on trust (Arrow, 1974) and thus, engaging in trusting behavior provides a socially desirable outcome since it (often) improves economic efficiency and well being (Putnam, 1993;Fukuyama, 1995;Knack and Keefer, 1997;La Porta et al, 1997;Dasgupta, 2000;Zak and Knack 2001). However, there exists a significant proportion of defectors in the population who betray this trust by appropriating the majority or all of the created surplus, and thus trusting everyone is clearly not optimal. 1 Given this, mechanisms to foster trust and trustworthiness may play a crucial role in establishing relationships and allowing transactions to occur.
Negotiations literature suggests that one way to win trust is to make concessions (e.g., Walton and McKersie, 1991). This advice is also commonly presented in the popular press. 2 Previous experimental literature sheds some light on the reasons why concessions might be so crucial. In a nice experiment Andreoni and Samuelson (2006) find that cooperation is best achieved when the parties first cooperate in a small-stakes, lowtemptation environment and then slowly evolve through a series of successful interactions into a large-stakes partnership. Based on Andreoni and Samuelson"s insight, concessions could be viewed as giving a gift prior to the transaction and thus creating a reputation or goodwill that influences the behavior of the other party. 3 A similar argument has been previously made in Servátka (2009Servátka ( , 2010 with respect to generosity. To explore this issue further we evaluate the effect of gift giving on trust in a stylized setting of the investment game (Berg et al., 1995). We build on previous research presented in Servátka et al. (2010) that compares the ability of monetary and nonmonetary mechanisms to enhance trusting behavior. Their study provides evidence that a 1 Throughout this paper we adopt the view pioneered by Cox (2000) who defines trust as follows: an action that generates a monetary gain which could be shared with another agent and exposes the trustor to the risk of a loss of utility if the other agent defects and appropriates too much or all of the monetary gain. A similar definition can also be found in Fehr (2009). 2 See, for example, "Tips to build trust during negotiation" The New York Times Syndicate, Tuesday, January 06, 2009. 3 If there exists a possibility for reputation building due to repeated interaction  and/or if the contract between the transacting parties is verifiable and enforceable (Charness et al., 2008), the problem whether to trust or not is easily mitigated because the parties face severe punishments on the off-equilibrium path. A competition among trustees is observed to have even stronger effects than reputation building (Huck et al., 2006), although Bracht and Feltovich (2009) show in a somewhat different setting that observing past behavior also has a powerful impact on relationships. gift has the potential to increase trust. A gift is a binary decision of a trustee who can send either nothing or all of his $10 endowment to the trustor in a dictator game stage prior to playing the investment game. If a gift is given, then in the case of zero return on investment, the trustor is at least as well off as if no transaction ever took place. Notice also that if a gift is given, the trustor"s intermediate endowment increases by the amount of the gift. Since a prior gain has been shown to increase risk seeking (Thaler and Johnson, 1990), it is possible that subjects will respond to this change in their endowment as well, especially if they consider the return on investment as uncertain due to the unknown reaction of the other player. Therefore, if one observes more investment following a gift than in the baseline investment game, it could be because trustor has more money (endowment effect) or because this behavior was directly triggered by gift (gift effect). In the current paper we experimentally identify these two effects and conclude that the increase in investment is caused by the gift effect and not the endowment effect.
Although the gift mechanism does not make the interaction between a trustor and a trustee repeated per se, it adds an extra stage to the game. This aspect relates our experiment to the recent findings that relationships evolve gradually and cooperation grows with each previous success. The aforementioned Andreoni and Samuelson (2006) consider twice repeated prisoner"s dilemma game in which they varied the distribution of payoffs between the two rounds. They find that total benefits from cooperation are highest when the payoffs are lower in the first than in the second round. A similar idea has also been studied by Kurzban et al. (2008). Their subjects play 10 rounds of the investment game with a fixed partner. The authors find that the rates of cooperation are higher in the repeated interactions condition than in the baseline one-shot condition. 4 Our study differs in the following respect. While the previous papers focus on repeated interactions and explore what kind of repeated interaction can lead to a trusting relationship, we are interested in a much different (and simpler) situation in which the trustee can make a gesture by sending a gift prior to a one-shot game. Notice that it is very difficult to make such gesture in the repeated interaction framework considered by Kurzban et al. because the action of the trustee always follows that of the trustor. It is therefore hard to disentangle whether the amount returned by the trustee indicates intentions for the future or whether it is a response to the amount sent by the trustor. In other words, is it a "promise" to cooperate tomorrow and/or is it a "thank you" for being nice to me today. Our design disallows the latter and enables us to focus on the effect of the former due to the nature of one-shot interaction. In addition, the relative simplicity of our design allows us to pin down the motivation behind trustor"s behavior.
In another related experiment Andreoni (2005) examines satisfaction guaranteed that explicitly promises to refund the price to the buyer. In reality, not honoring satisfaction guarantee can have legal consequences for sellers, but suing over a small transaction can be too costly, and thus this trust building contract device can be seen as nonbinding for some sellers. In his experimental design, Andreoni combines the investment game with the ultimatum game (Güth et al., 1982), thus giving the trustor an option to annul the transaction if he is not satisfied with the outcome. If satisfaction guaranteed is voluntary and non-binding, the trust of buyers is greatly reduced compared to when it is binding. The decrease in trust is well justified as only 17% of sellers chose to honor the guarantees. The main difference between our study and Andreoni"s (other than a gift and satisfaction guaranteed not being strategically equivalent) is the fact that a gift is given before the transaction takes place, and hence there is no way to reverse the gift if the trustee defects whereas in satisfaction guaranteed sellers can renege if a refund is requested. Bracht and Feltovich (2008) study a simple precommitment mechanism in the investment game. Similarly to our experiment, they also add a pre-game stage during which the trustee has an opportunity to place some amount of money into an escrow account. The entire sum from the escrow account is returned to him if the trustor does not invest any money or if the trustors invests and the trustee splits the surplus. However, if the trustor invests and trustee appropriates the surplus, the entire escrow amount gets forfeited, but the trustor does not receive anything. Bracht and Feltovich find that the efficiency of the mechanism depends on the amount that is deposited into an escrow account, but not so much on whether it is chosen voluntarily or imposed by the experimenter.
The common feature of satisfaction guaranteed and escrow account is that they both reduce the need for trust by enforcing a certain degree of cooperation. Thus, the punishment mechanism drives the behavior of trustors and trustees as the investment can be recouped and escrow forfeited. However, enforceable satisfaction guaranteed and escrow accounts are not always available to the transacting parties. Therefore, it is important to understand how much we can accomplish by widely available monetary mechanisms that do not rely on enforceability. Finally, this lack of enforceability connects our study to the previous research on costless mechanisms fostering trust and cooperation, such as communication (e.g., Dufwenberg, 2006 andBen-Ner et. al., 2007;Ben-Ner and Putterman, 2009;Deck, 2010) or the ability to observe past behavior (e.g., Bolton et al., 2004;Bracht and Feltovich, 2009).

Experimental Design and Procedures
The experiment consisted of 10 sessions conducted at the University of Canterbury in Christchurch, New Zealand. Each session included a minimum of 12 subjects with a total of 206 subjects participating in the study. Most of the subjects had previously participated in economics experiments. Each subject only participated in a single session of the study. On average, a session lasted 50 minutes including initial instructional period and payment of subjects. Subjects earned on average 15.66 New Zealand Dollars (NZD). 5 All sessions were hand run in a classroom under a single-blind social distance protocol.
Our experiment consists of three treatments (Baseline, Gift, and Endowment Control) implemented in an across subjects design. Baseline is the standard investment game by Berg et al. (1995). There are two players, A and B, both endowed with $10 at the beginning of the game. The first mover, player A, decides on a whole dollar amount s {0,1,2,…,10} to send to his counterpart player B. The amount sent is tripled by the experimenter. The second mover, player B, then decides how much of the tripled amount, r {0,…,3s} to return in whole dollar amounts to player A. 6 5 The adult minimum wage in New Zealand at the time of the experiment was 10.25 NZD per hour. 6 The behavior of player A and player B can be interpreted as proxies for trusting and trustworthy behavior (Charness et al., 2008). There are other possible motivations why players would send and return positive amounts, such as other-regarding preferences (Cox, 2004) or preferences for increasing social welfare (Charness and Rabin, 2002). One could, of course, also ask the follow up question: How does a gift affect Gift involves the investment game as described in Baseline preceded by a dictator game stage during which player B has a binary decision of whether to transfer his entire $10 endowment to player A or not. 7 In the investment game that follows, player A is still constrained to sending a maximum of $10 even if player B decided to transfer his endowment to player A.
Endowment Control treatment is analogous to Baseline and differs only in the endowment given to both players: Player A starts the game with $20 and player B with $0. This treatment is necessary to identify the endowment effect in subjects" behavior. In particular, giving a gift changes the players" payoffs from ($10, $10) to ($20, $0). It is therefore possible, that any changes in amounts sent by player As and returned by player Bs between Gift and Baseline treatments are due to changes in endowments rather than due to the pure effect of giving a gift. 8 The subjects in each session were randomly assigned to be either player A or player B and randomly matched into pairs. The procedures for this allocation were as follows. The classroom used for the experiment was segmented in half such that the group of desks corresponding to a given type was located on the same half of the room.
The desks for each type were arranged in rows facing opposite walls such that subjects of opposing types could not see each other while making decisions during the experiment.
At the beginning of each session, subjects were free to choose any desk upon entering the classroom. The allocation of types to the two different groups of subjects was done by publicly flipping a coin. The experimenter then randomly assigned a member from each group to create individual and anonymous player A and B pairings.
All instructions were projected on an overhead screen and read aloud. Subjects were encouraged to privately ask any questions they may have throughout the experiment. In the Gift treatment, the investment game and general procedures were explained first. Only then did the experimenters announce that before the described game other-regarding preferences? In this paper we are primarily concerned with the size of the investment and efficiency. 7 The decision of player B is binary for two reasons: (i) it makes mimicking of trustworthy types simple and (ii) it makes it easy to design a treatment controlling for the amount of money possessed by the two players when making their respective decisions. 8 An alternative design would be to include a "mandatory gift" treatment where both players begin with $10, but the experimenter imposes a "gift" of $10 on the trustee. While this alternative addresses the possibility of player A"s internalizing the $20 endowments, it is also likely to introduce experimenter demand effects and possibly even create confusion among subjects. is played, player B has an opportunity to send their endowment to their counterpart player A. Upon completion of the instructional phase of for this dictator game stage, players B made their decisions of whether to transfer their endowment or not to their counterpart on provided decision sheets, which were afterwards collected by the experimenters. The decision of player Bs" was written by the experimenter on their counterpart player As" investment game decision sheet in the following form: Player B has transferred $____ to you before the start of the game. This amount is yours to keep and will be added to your earnings.
Given this information, Player As were asked to answer a question of why they believed that their counterpart player B transferred or did not transfer their endowment to them. 9 It was made clear to subjects that their answer to this question would be private information and not shared with their counterparts. This completed the dictator game phase of the Gift treatment.
The following investment game procedures were the same for all treatments.
Player As wrote on their private decision sheet of how much money they wanted to transfer to their counterpart player B. Player As" decision sheets were collected, the amount transferred was tripled by the experimenter and written on their counterpart player B"s decision sheet, and then all decision sheets were returned to the subjects. Now knowing how much their counterpart transferred to them, player Bs decided how much of that tripled amount they wanted to transfer back to their counterpart player A and how much to keep for themselves. The experimenters then collected all decision sheets, copied player Bs" decisions on their counterpart player As" decision sheets, and returned the sheets to all players to reveal their earnings. Lastly, subjects were privately paid their experimental earnings. 9 We make use of the Baseline and Gift treatment data that were presented in Servátka et al. (2010). This other paper included a communication treatment where among other things we studied decision maker"s interpretation of the message as an alternative for a 3 rd party interpretation. In order to be consistent across treatments an analogous question was asked in treatments analyzed in the current study. By including the non-salient questions our procedures differ from the standard way the investment game is run. We have checked our data against data in Cox (2004) for any effects of including these questions and found no significant differences in subjects" behavior in the respective baseline treatments.

Behavior of Player As
Player As are obviously better off in monetary terms when they receive a gift. 10 As reported in Servátka et al. (2010), player As send more on average in Gift than in the Baseline. However, is the increase in amount sent under Gift due to the gift effect or due to the endowment effect?
Subjects" behavior from all three treatments is summarized in the first three columns of Table 1. Player As sent the lowest average amount of 4.73 in Endowment Control, slightly higher of 5.50 in Baseline, while in Gift the average amount was 6.50 (7.31 if the gift was actually given and 3.75 if not). This difference is even more pronounced when looking at medians. While in Baseline and Endowment Control the median amount sent was equal to 5, it was 9.50 in Gift (10 if the gift was given and 2 if not). The Wilcoxon rank-sum (WRS) and a more conservative robust rank-order (RRO) tests presented in Table 2 break up the behavior of player As into an endowment effect and a gift effect. It might be somewhat surprising that player As sent on average less money when they were endowed with $20 than when they were endowed with only $10. This behavior does not support the conjecture presented in the previous literature that subjects are more likely to "gamble" with (more) house money, but rather suggests that player As realize that given the asymmetry in endowments it is rather unlikely that they will benefit financially from sending money to player Bs. The (negative) endowment effect, however, is not statistically significant.
Similarly, no statistically significant difference is detected for the amount sent in Gift versus Endowment Control or for the amount sent in Gift versus Baseline at the treatment level. So just having a chance to receive a gift or having a larger endowment does not change player A"s behavior. Hence we observe no significant changes in efficiency solely based on treatment participation. Our main question is concerned with what happens if the gift is actually given.
The twenty-six out of thirty-four player As who received a gift from player Bs sent on average 7.31 (with the median of 10), whereas the remaining eight who did not receive a gift sent on average only 3.75 (with the median of 2). To separate out the gift effect, the appropriate point of reference is the Endowment Control treatment data. When we control for the endowment differences, receiving a gift is responsible for a significant increase in the amount sent by player A as reported by WRS and RRO tests (p = .022 and .028, respectively) presented in row 4 of Table 2.
A combination of the gift effect and the endowment effect (i.e., the comparison of the data when a gift was given with Baseline) is also (weakly) statistically significant as reported in row 3 of the same table (p = .044 and .083). Thus, we conclude that receiving a gift caused player As to send higher amounts in our experiment, thereby providing higher efficiency levels.

Behavior of Players B
In this subsection we analyze whether player Bs are (i) made better off in monetary terms by giving a gift and (ii) how does giving a gift affect the amounts they return back to player As.
Giving a gift is costly to player B as he might be forgoing $10 if player A decides not to send anything. In order to determine whether player Bs are made better off in monetary terms by giving a gift, we compare the payoffs of player Bs who give a gift with those who do not (within treatment comparison) and also with those who participate in Baseline (across treatment comparison). Twenty-six players Bs who gave a gift earned on average $18.00 while those eight who did not made on average $19.00. This difference is not statistically significant according to WRS test (p = .525). On the other hand, thirty-three player Bs who participated in Baseline and thus did not have an option to give a gift made on average $21.80. Albeit higher, this amount is not statistically significantly different from payoffs of player Bs who gave a gift according to WRS test (p = .639). Nevertheless, when comparing means, the increase in the amounts sent by player As was too low to offset the reduction in player Bs" payoffs due to the giving a gift. 11 Next we discuss the effect of gift giving on the amount returned by player B"s. Table 2 presents a summary of player B"s behavior in our experiment. Note that in the investment game the strategy space available to a player B"s depends on the decision of 11 The difference between the average amounts sent by player As who received a gift and those in Baseline is equal to $1.81. So even if this amount is tripled and would be all retained by player Bs, they would be better off monetarily by not giving the $10 gift. player A. In particular, if player A sends 0, player B has no other option than to return 0.
Therefore, to make a better assessment of player B"s behavior we exclude such subject pairs from our analysis. This partly corrects for correlation of choices caused by the experimental design. We then compare the distributions of amount returned by player B"s using Epps-Singleton test (last column in Table 2).
We find that the highest average amount returned is in Baseline (6.44), followed by Gift (4.26) and Endowment Control (4.13). If a gift was given, the average amount returned is 4.23. The Epps-Singleton tests reveal that the differences between the amount returned in Baseline and Endowment Control as well as Endowment Control and Gift when a gift was given are statistically insignificant. However, the amount returned in Baseline is significantly higher than after a gift was given (p = .020), suggesting a presence of an entitlement effect (Gächter and Riedl, 2005) after player B"s paid to influence the outcome of the transaction.

Discussion
This paper reports on an experiment that studies the effectiveness of gift giving in promoting trust (i.e., increasing amount sent and thus efficiency). We have nested our findings in the standard version of the investment game to clearly observe the directional changes. We observe that when controlling for the endowment differences, receiving a gift significantly increases the amount sent by player As in the investment game.
However, player Bs are not better off monetarily by giving a gift as the increase in the amount sent is not large enough to offset the loss to player Bs. The data also show that player Bs decrease the amount returned after they have given a gift.
Our finding thus suggests that giving a gift increases trust. However, our data is still to be interpreted with caution as it is not obvious how the size of the gift implemented in the experiment interacts with the decisions of both players. Our primary goal was not to provide an exact recommendation on how to use gifts in order to induce an optimal amount of trust, but rather to illustrate that a gift could be an important step in building a trusting relationship. On the other hand, our data also point out that the player Bs are not being sufficiently compensated to cover the size of the gift. This could be an artifact of our design, e.g., the gift choice being binary and relatively expensive.
We have shown that receiving a gift increases the amount sent by player As.
There could be numerous possible explanations for this behavior. One of them, reciprocity (Rabin, 1993;Dufwenberg and Kirchsteiger, 2004;Falk and Fischbacher, 2006;Cox et al., 2007 and, is notably consistent with our data. In particular, when player As receive a gift, they seem to regard it as a kind action and respond positively.
On the other hand, when giving a gift is an option and player Bs do not give, the few instances suggest that player As respond negatively by sending a smaller amount.
Although it was not the purpose of our experiment to properly test this particular explanation, we believe that it might be interesting to pursue this question in future research with a more appropriate design.
Finally, recall that in our experiment it was publicly announced that giving a gift was an option and because of that not giving a gift could have had some consequences as well. Therefore, we think that an interesting extension of our design would be to give player Bs an option to send a gift without letting player As know about it. Although there are no surprises in equilibrium, there exists ample evidence that subjects in experiments do not follow Nash equilibrium predictions in games with salient fairness considerations.
Therefore, it is possible that receiving a gift in such situation might have different behavioral implications. As before, we leave this line of research for future explorations.
You are a Player ____ ID#:____

GENERAL INSTRUCTIONS
This is an experiment studying decision-making. The instructions are simple and if you follow them carefully and make good decisions, you might earn a considerable amount of money which will be paid to you in cash at the end of the experiment. It is therefore very important that you read these instructions with care.

No Talking Allowed
It is prohibited to communicate with other participants during the experiment. Should you have any questions please ask us. If you violate this rule, we shall have to exclude you from the experiment and from all payments.

Anonymity
Each person will be randomly matched with another person in the experiment. No one will learn the identity of the person she/he is matched with. You will be matched with the same person for the entire experiment.

Types
Each two person group will consist of two types of participants (Player A and Player B) that are assigned randomly.
Your assigned type will be listed at the top of each task instruction sheet.

The Game
You are randomly paired with another individual. One member of your pair will be a player A and the other one will be player B. Find your type in the upper left corner of this sheet. You will never be able to find out the identity of the player you are paired with.
Each player"s final dollar payout will be determined according to the process below. The game is divided into stages in which players take turns making decisions. Both player A and player B begin the game with $10. We will refer to this initial $10 as each player"s endowment.

Stage 1:
At the beginning to stage 1, player A has the opportunity to transfer all, any portion, or none of his/her $10 endowment to player B. The amount that is not transferred is player A"s to keep. The amount that player A transfers triples when it reaches player B. For example, if A transfers $10 to B, B receives $30. If A transfers $5 to B, B receives $15. If A transfers $0 to B, B receives $0.

Stage 2:
Player B then has the opportunity to transfer all, any portion, or none of the tripled amount that was transferred to him/her from player A. The amount that is not transferred is player B"s to keep, and the amount transferred is added to player A"s final dollar payout.
You are a Player A ID#:____

The Game: Stage 1 Decision Sheet
Player B has transferred $____ to you before the start of the game. This amount is yours to keep and will be added to your earnings.
Why do you believe Player B transferred or did not transfer their $10 endowment to you in the pre-game?

____________________________________________________________________________________
The Game decision: You must decide how much, if any, of your $10 endowment you want to transfer to player B.
Each dollar that is not transferred is yours to keep.
Each dollar that is transferred to Player B is multiplied by 3 by the experimenter.
I have decided to transfer $______ to player B. Each dollar that is not transferred is yours to keep. Each dollar that is transferred is added to player A"s earnings.
Please complete the statements below. Your decisions must be non-negative integers.
I have decided to transfer $______ to player A. Therefore, I have decided to keep $_______ for myself.