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Karlan, D. (2005). Using Experimental Economics to Measure Social Capital and Predict Financial Decisions. American Economic Review, 95 (5), 1688-1699

Economic theory suggests that market failures arise when contracts are difficult to enforce or observe. Social capital can help solve these failures. The more individuals trust each other, the more able they are to contract with each other. 1 Hence, many believe trust is a critical input for both macro- and microeconomic outcomes. The Trust game has become a popular tool, with many researchers conducting it in both university laboratories and field locations in developing countries (Abigail M. Barr, 2003, Joyce E. Berg et al., 1995, Edward L. Glaeser et al., 2000). These studies have found that behaviors in the Trust game correlate intuitively with individual attitudes and the relationships between players. However, these are not outcomes of real interest, but rather proxies (or correlates) for the ability to overcome market failures and complete otherwise difficult to enforce contracts.
Historically, experimental economics has limited itself to testing theories in a controlled, laboratory environment, where behavior in the game is the outcome of interest. Exceptions exist, but are limited.2 The Trust game presents an excellent opportunity to examine whether experimental economic games can predict non-laboratory decisions. The game is conducted between two players and an administrator, and purports to measure how much one player (A) trusts another player (B) and how trustworthy Player B is with respect to Player A.
This paper tests these characterizations: I conduct the game with borrowers in a Peruvian microcredit program, Foundation for International Community Assistance (FINCA). I find that Player B’s identified as trustworthier in the game are more likely to repay their loans one year later. However, I find that Player A’s identified as more "trusting" save less and have higher repayment problems. I put the term "trusting" in quotes specifically because this paper calls into question whether Player A's behavior in the game is driven by trust or merely a propensity to gamble.


Karlan, Dean

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