Journal of Economic Psychology 24 (2003) 447466 www.elsevier.

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A comparison of trust and reciprocity between France and Germany: Experimental investigation based on the investment game
Marc Willinger
a

a,*

, Claudia Keser b,c, Christopher Lohmann Jean-Claude Usunier f

d,e

 Louis Pasteur, 61 av. de la Foret Noire, Institut Universitaire de France, BETA-Theme, Universite Strasbourg 67085, France b IBM T.J. Watson Research Center, Yorktown Heights, NY, USA c CIRANO, Montreal, Canada d Universit at Freiburg, Freiburg, Germany e Allianz AG, Munich, Germany f Graduate School of Business, Universite  de Lausanne, Lausanne, Switzerland Received 6 July 2001; received in revised form 18 July 2001; accepted 30 January 2002

Abstract We compare the results of a one-shot investment game, studied earlier by Berg et al. [Games and Economic Behavior 10 (1995) 122], for France and Germany. In this game, player A is the trustor and player B the trustee. The average level of investment is signicantly larger in Germany, but the level of reciprocity is not signicantly dierent between the two countries. This implies that German B-players earned signicantly more than French B-players. Furthermore, in both countries B-players earned signicantly more than A-players. Our results support Fukuyamas conjecture that the level of trust is higher in Germany than in France, a situation which can explain a higher rate of investment and a higher level of performance. However, our results also show that the increased revenue which is attributable to the higher level of trust, is not shared in a more equitable way, but essentially increases B-players payos. Finally, based on an intercultural trust experiment, we show that French A subjects did not nd German B subjects less trustworthy and German A subjects did not nd French B subjects less trustworthy. 2003 Elsevier B.V. All rights reserved.

Corresponding author. Tel.: +33-390-41-4054; fax: +33-390-41-4050. E-mail address: willma@cournot.u-strasbg.fr (M. Willinger).

0167-4870/03/$ - see front matter 2003 Elsevier B.V. All rights reserved. doi:10.1016/S0167-4870(02)00165-4

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PsycINFO classication: 2910; 3000 JEL classication: C91; C70 Keywords: Trust; Reciprocity; Experimental economics; Social-psychology

1. Introduction Like norms and other codes of behavior trust has been described as a lubricant without which many of the most essential everyday decisions would not be possible in a world of transactions costs (see Arrow, 1969, 1972). Since relying on trust is to some extent inescapable, the question naturally arises whether trust inuences performance. Does a higher level of trust lead to a more protable outcome for the implied parties? Does it aect economic performance overall? Without a minimum level of trust, some desirable transactions would probably never occur, but, on the other hand, too much trust could induce undesirable allocations in case of cheating. As Arrow (1972, p. 357) puts it Virtually every commercial transaction has within it some element of trust, [. . .] It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual condence. Several recent contributions (Fukuyama, 1995; Gambetta, 1988; Putnam, 1993) have tried to show that trust within the society aects the performance of its institutions. The central idea is that trust is a basic element of the social capital, a concept introduced by Loury (1977), and social capital determines peoples ability to cooperate and contribute to socially ecient outcomes. Fukuyama even argues that trust determines the performance of all institutions, including rms. It has been argued that trust is more essential for the performance of institutions when the interactions among people are infrequent and involve strangers rather than partners (see La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1997). When interactions are frequent and repeated, there are many opportunities for using threats, punishments or building reputation. But, there are fewer such opportunities when people interact infrequently and mainly with strangers, and trust becomes more important for promoting cooperation. In large organizations whose members are only seldom involved in joint production, trust therefore becomes a key factor of their performance. According to Fukuyama (1995), the idea can be transposed at the society level. Low trust countries have a lower overall economic performance than high trust countries. Fukuyama does not provide a formal demonstration of his argument, but relies on a historical analysis of institutions showing that higher levels of trust emerged more naturally in some societies than in others. While Fukuyama reviews many countries, he argues in particular that individuals in the German society are more naturally led to trust each other than members of the French society, due to fundamental dierences in cultural, institutional and religious heritage. At rst glance, Fukuyamas conjecture seems dicult to verify, since indicators of performance and trust in a society can be dened in many ways. Moreover, trusting behavior as well as trustworthiness are generally not observable directly. The standard approach for measuring trust is based on attitudinal questionnaires, such as the General Society Survey (GSS)/World Values Survey (WVS) of the National Opinion Re-

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search Center. Based on the measure of trust from this study, La Porta et al. (1997) showed that trust has a signicant impact on several performance indicators, such as government eectiveness or participation in large civic organizations. Relying on the same measure of trust, Knack and Keefer (1997) showed that an increase in the level of trust positively aects the annual growth rate of per capita income. While these studies provide interesting results, they lack a precise measure of trust. Instead, they use responses to a hypothetical question, asking the trust question in very general terms, which can correspond to many dierent individual representations. Furthermore, Glaeser, Laibson, Scheinkman, and Soutter (2000) recently showed that there was virtually no relation between trust measured by attitudinal questionnaires and trusting behavior observed in a controlled (experimental) environment. Because of the weaknesses of measures of trust based on questionnaires, the present study investigates the relation between trust and performance in a controlled experiment. Moreover, we rely on a game theoretic approach for dening trust in our experiment. We dene placing and not placing trust in someone and rewarding and exploiting someones trust as strategies in a specic two-person strategic setting. The experiment is based on the so-called investment or trust-game, which was rst studied by Berg, Dickhaut, and McCabe (1995). In essence, this game puts subjects in a situation in which anonymous subjects are called upon to trust and to reward trust. Our experiment tries to nd out whether the origin of people has an inuence on trusting behavior. 1 Our results show that, in keeping with Fukuyamas conjecture, the trust level of French student subjects, measured by the amount sent in the investment game, is signicantly lower than the trust level of German student subjects. An additional intercultural experiment allows us to explore the reputation for trustworthiness across the two countries. Section 2 introduces Fukuyamas (1995) conjecture. Section 3 shows how trust is naturally dened in a game of trust, which is also called the investment game. Section 4 describes the experimental procedure and Section 5 presents the main results. Section 6 compares our data to the original data by Berg et al. (1995). The results of a cross-cultural investment game experiment are given in Section 7. Section 8 summarizes and concludes.

2. The Fukuyama conjecture In his book Trust: The Social Virtues and the Creation of Prosperity (1995), Fukuyama denes trust as the expectation that arises within a community of regular, honest, and cooperative behavior, based on commonly shared norms, on the part of other members of that community (p. 26). According to Fukuyama, trust between people within a particular society, which he equates with social capital, fuels economic performance. Trust is based on a moral consensus between economic partners, which enables them to stick to their commitments without being obliged to do

See Croson and Buchan (1999) for a related study.

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so by the sole means of formal contracts and legal obligations. The social capital embedded in trusting relationships is present in most forms of communities, ranging from the family to professional associations, corporations, and nations. According to Fukuyama a high level of trust in a society is a key factor of success for companies because it enhances their capacity to develop large-scale operations, to manage complex industrial relations, and to balance relationships between stakeholders in the corporate governance process. Trust enables economic players to reduce transaction costs, because partners are less opportunistic and costly litigation can be avoided. According to Luhmann (1988), trust is a solution for specic problems of risk taking, which involves previous commitment and the acceptance that unexpected results may be a consequence of ones own decisions. Luhmann makes a sharp distinction between condence, a broad feeling that our expectations will not be disappointed, and trust which requires engagement of the self and rational evaluations of risks. Deceived condence typically leads to external attribution (the system is responsible for my disappointment) whereas deceived trust leads to internal attribution (I did not make the right choice in trusting this person or organization). According to Luhmann (1988, 97103): The distinction between condence and trust depends on our ability to distinguish between dangers and risks [. . .] political and economic liberalism attempts to shift expectations from condence to trust [. . .] The large functional systems depend not only on condence but also on trust [. . .] the lack of trust reduces the range of possibilities for rational action [. . .] through lack of trust a system may lose size. Fukuyama contrasts high-trust societies such as Japan and Germany to low-trust societies such as France, Italy or Korea. In low-trust societies, trusting relationships tend to be limited to the restricted family or ethnic group. People, be it entrepreneurs or workers, nd it dicult to create horizontal organizations, such as guilds, unions, and club-like organizations. Low-trust societies are typically associated with strong hierarchy within the society and much centralization of state authorities and organizations. It has been argued that hierarchical religions, especially the Catholic church, have discouraged the formation of horizontal cooperation networks and hampered the spontaneous economic sociability that leads people to create horizontal associations, either family- or state-related (Putnam, 1993). The introduction of external management talents, as well as the merging of companies required for reaching global competitiveness, are curtailed by the low level of trust in outsiders, that is, distrust in non-members of the in-group. Fukuyama explains that in low-trust societies, public authorities were obliged to be directly involved in the creation of large organizations that could compete on world markets. They did it with less ecient control of nancial markets and with some waste of public money, that is, with less ecient resource allocation than in high-trust societies. Fukuyamas thesis has been criticized for its proof-by-anecdote methodology and missing empirical foundation. Koehn (1996, p. 184) argues that the denition of trust by Fukuyama tends toward cronyism, favoring the view that we are to trust people in the community who have the same values, the same norms as we do. She rightly argues that trust should not necessarily be based on shared norms. On the empirical level, Fukuyamas approach has been criticized for its lack of sound proofs. It is

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based on a mix of a socio-political and historical analysis and relies on a proof-byanecdote methodology rather than on substantive evidence (Solow, 1995). Solow quotes evidence that is damaging to the thesis. He also highlights the measurement diculties, which are further aggravated by the conceptual confusion made by Fukuyama between social capital, spontaneous sociability and trust. Only recently did La Porta et al. (1997) and Knack and Keefer (1997) provide empirical support. Both studies are based on a measure of trust derived from answers to attitudinal questions from the WVS. La Porta et al. (1997) tested the eect of trust on the performance of large organizations in 40 nations. They measure social and economic performance by a number of indicators: government eectiveness, participation in civic organizations, and size of the largest rms relative to GNP. The evidence brought by La Porta et al. is highly conclusive: trust promotes cooperation, especially in large organizations. The link between trust and religion is also highly signicant suggesting that hierarchical religions cause distrust and are detrimental to economic performance as a whole, conrming Putnams thesis. In their study based on 29 market economies, Knack and Keefer (1997) showed that trust and civic cooperation have signicant impact on aggregate economic activity. They found that a 10%-point rise in their trust variable is associated with a 0.80% increase in annual growth of per capita income. Furthermore, a four-point increase in their 50-point scale of civic cooperation increases growth by more than 1%. While the verication of Fukuyamas thesis is strong on a large cross-sectional sample of countries, it is less so at the level of two archetypal societies, namely a low-trust society such as France and a high-trust society such as Germany. There exists a signicant dierence in the trust level: in terms of the relevant question of the WVS, 37.9% of the respondents in Germany versus 22.8% of the respondents in France answered that most people can be trusted (see below for the exact question), a dierence which is signicant at 0.01% level. Furthermore, there is a dierence in the level of hierarchical religion (score of 40 for Germany against 91 for France). However, the two countries are extremely close with respect to economic performance. Moreover, other evidence tends to disconrm Fukuyamas thesis as concerns France and Germany: the sales gure of the top 20 largest rms as a percentage of GNP is larger for France and tax evasion is larger in Germany. 2 Clearly, further evidence is needed. Another diculty of previous studies is that the standard measure of trust is based on answers to attitudinal questions. The most used one is the GSS from the WVS of
2 Based on the data of La Porta et al. (1997), the dierence in the average annual growth of GNP/capita over a long period of time (19701993) between France (1.9%) and Germany (2.04%) is rather small. However, the dierence in economic performance between France and Germany is more apparent when one considers the challenge of German reunication over the last 10 years. In 1990, the year of German reunication, French GNP per capita was $21,077 against $24,485 for West and $8,894 for East Germany. In 1991, the reunited Germany displayed a GNP per capita of $21,540 quite similar to that of France with $21,063. However, the gap has widened again and in 1995 French GNP per capita was $26,444 against $29,632 for reunited Germany which had had in the meantime the dicult duty of digesting a quasibankrupt country. These gures (OECD, adjusted for purchasing power parity) suggest that the dierence in economic performance, although not a major one, is signicant over time.

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the National Opinion Research Center, based on probabilistic samples of 1000 respondents in each country surveyed. The GSS includes the following question: Generally speaking, would you say that most people can be trusted or that you cant be too careful in dealing with people? Trust is measured by the percentage of respondents from each country who answered that most people can be trusted when asked. Answers to this question are ambiguous. 3 While respondents can have dierent beliefs about trustworthiness of a given group of people, they can also have dierent opinions about the meaning of most people, or they can dier in their interpretation of the notion of trusting other people. In order to dene a less ambiguous measure, Glaeser et al. (2000) proposed to measure trust by relying both on respondents answers to a questionnaire and on their observed behavior in a laboratory experiment based on a variant of the investment game (see Section 3) involving real money payments. 4 Their questionnaire included 12 specic attitudinal questions about trusting others, including the GSS question. They found for a sample of rst year Harvard students, that trust measured by attitudinal questions does not predict trusting behavior in the laboratory, except for two of the questions that were focused specically on trusting strangers. They also found that measures of past trusting behavior were positively correlated with the amount sent in the investment game, suggesting that there might be a stable component of trusting behavior over time. Among other ndings of Glaeser et al. (2000) is the observation that subjects who are paired with a partner of a dierent race or nationality send back less money to their partner in the investment game. 5 Earlier studies also showed that trust tends to decline in later cohorts in the USA, and that trust tends to be stronger among richer and higher educated people. Furthermore, trust has been found to be stronger in predominantly protestant countries. 6

3. Trust in games In Section 3.1, we outline our understanding of trust and how we will test whether or not people trust each other. Then, we will turn to the results of preliminary work in Section 3.2.

3 The GSS trust question is possibly confusing: the ambiguity between or and and/or may have led some respondents to blurred answers. The ambiguity of the wording may partly explain the discrepancy between trust as measured by experimental games and trust as measured by the GSS survey. 4 In their experiment the amount sent was only doubled by the experimenter. Subjects were rst year Harvard students and knew with whom they were paired during the investment game. 5 In their variant of the investment game, there was no anonymity between the players. Nationality was dened by the country of residence at the age of 16. 6 This result is conrmed by Knack and Keefer (1997) and more recently by Goldin and Katz (1999) who found that the proportion of residents in an area who were Lutheran early in the 20th century strongly predicts current measures of social capital.

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3.1. The investment game We dene the terms of placing or not placing trust in someone and rewarding or exploiting someones trust, as strategies in a specic two-person strategic setting. 7 More specically, a two-stage and two-person interaction reects a situation of trust if the following conditions are met (see Berg et al., 1995): (i) One of the players, the trustor, is rst asked whether he gives a second player, the trustee, the right to take a decision which aects the payo of both players. (ii) By placing trust the trustor puts himself at risk. (iii) Honoring trust benets the trustor at a cost to the trustee. (iv) Placing and honoring trust Pareto-dominates the subgame perfect equilibrium outcome, for which the trustor refrains from placing trust. The investment game, introduced by Berg et al, is a sequential game that combines the above conditions. At the beginning of the game each player is endowed with 10 currency units. In stage 1, player A (the trustor) is oered the opportunity to send to player B (the trustee) any integer amount, S , of her currency units (S 0; 1; . . . ;10). In stage 2, player B who receives 3S has to decide how many currency units, R, he wants to return to player A (R 0; 1; . . . ; 3S ). By sending a strictly positive amount of money, player A trusts that player B will return at least the amount sent. A return of R P S might be interpreted as player B honoring the trustors trust, while returning less, and in particular returning nothing, clearly is an exploitation of the given trust. For rational selsh players, the unique subgame perfect equilibrium is R 0 and S 0. By backward induction, if player A trusted player B, the trustee B would rationally exploit trust (R 0), since exploiting trust maximizes his payo. Anticipating this, player A will refrain from trusting, and send nothing to player B, which guarantees her a payo of 10 currency units. Like in the prisoners dilemma game, the investment game raises a social dilemma: the no-trust outcome is Pareto-dominated by any honored-trust outcome, where player A, investing a positive amount, trusts player B. However, following Harsanyi (1977) the collectively rational outcome is not the trivial result of individual preferences and individually rational strategy choices. In the subgame perfect equilibrium each player has a payo of 10 currency units, and the collective outcome is therefore equal to 20 currency units. If S > 0 the collective payo is equal to 20 2S currency units, which is maximized for S 10. The possible collective payos can therefore be Pareto ranked according to the level of S 0; 1; 2; . . . ;10, as long as R P S . The subgame perfect equilibrium does not correspond to our everyday experiences in many situations involving trust. Many people put themselves at risk by

7 One should keep in mind that the denition of trust as a strategy in a certain strategic setting diers from other interpretations of trust. For example, Luhmann (1988) denes trust and rational decision making as alternative ways to reduce complexity. While in the rational approach people decide rationally whether to trust or not, according to Luhmann trust might be called upon if rational decision making fails. Furthermore, following Ortmann, Fitzgerald, and Boeing (2000), one might argue that choosing to trust can be the result of confusion, loss of saliency, curiosity or framing eects.

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placing trust in others, who in turn refrain from exploiting trust. The same is true for most subjects that have taken part in experiments on the investment game. 3.2. Subjects behavior in the investment game A number of experiments on the investment game have revealed that subjects in the role of player A send signicantly positive amounts to those in the role of player B. The latter tend to return on the aggregate the amount that player A invested and, thus honor player As trust (without being too generous, though). We may, thus, conclude that subjects motivations dier from the purely selsh and self-interested motives on which the game-theoretical solution is based. In their seminal experiment Berg et al. (1995) observed that in more than 90% of their 60 subject pairs, player A sent a positive amount to player B. In more than 45% of these cases player B returned a positive amount, which implies that more than half of the B-players did not reciprocate at all. Berg et al. distinguished between two different treatments, their reference treatment, called no history treatment, and the so-called social history treatment. In their reference treatment all but 2 of the 32 A-players sent some money ($5.16 on average). Player B returned an average of $4.66. While one third of the trustees returned more than their counterpart sent, another third returned only one dollar or nothing, i.e. chose their individually rational strategy according to game theory. The latter might be due to either strict self-interest or the fact that on average the money sent was regarded as too low for creating an obligation to reciprocate. Providing subjects with additional information on the amounts invested and returned in a previous experiment in the social history treatment leads to increases in the amounts of money sent ($5.36 on average) and returned ($6.46 on average). Furthermore, the percentage of B-players returning R < S rises, while the percentage of B-players choosing their individually rational strategy falls. While Berg et al. (1995) did not nd a signicant correlation between the amount sent by player A and the percentage returned by player B, for US student subjects, Meidinger, Robin, and Rueux (1999), found a signicantly positive correlation in a sample of French student subjects. These contrasting results can be due to cultural dierences, implying dierent attitudes with respect to reciprocity. Moreover, with respect to the amount invested by player A (60% of the endowment in France versus 51.6% in the US) these two studies show no signicant dierence. Ortmann et al. (2000) investigated the plausibility of other possible explanations than trust as a primitive (a guiding behavioral instinct applied to unfamiliar situations) for the results of Berg et al.: confusion, lack of saliency and, most importantly, framing of the information provided in the social history treatment. Berg et al. furnished the participants in the social history treatment with information on the absolute $ returns on investment and not on the proportion of the available funds returned. In other words, Berg et al. provided information on the averages of S and R. This may have misled subjects to believe that subjects in the earlier experiments returned money fairly when in fact, room B participants decided on uneven allocations (Ortmann et al., 2000). To control for a possible framing eect,

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Ortmann et al. ran an experiment in which the results of the no history treatment were used to construct both the social history treatment used by Berg et al. and a modied social history treatment. In the latter subjects were given information on the proportion of the available funds returned, i.e., on R=3S . 8 Second, they ran an additional treatment including a questionnaire prompting strategic reasoning on the part of player A. Their results however show than none of these modications signicantly aected the amount sent by A-players. Bolle (1998) tested a variant of the investment game, called the rewarding trust game, which satises the four conditions of Berg et al. (1995). In this game player A (the trustor) is endowed with 80 Deutsche Marks (DM). He has two options: he can keep the money (refrain from trusting), or he can give the entire amount to an anonymous player B (the trustee). If the trustor gives the trustee the money, the amount is doubled and the trustee has to decide how much money (if any), R, he wants to return (R 2 f0; . . . ;160}). There are dierent degrees of rewarding trust, but returning less than 80 DM may clearly be interpreted as exploiting trust. If player A refrains from trusting, player B gets nothing. In a one-shot game experiment in the classroom, anonymity was guaranteed: nobody, neither any of the other players nor the experimenter, was able to identify the individual moves of the subjects. Such an anonymous double blind setting excludes any kind of observable or unobservable social pressure, and the subjects should decide only on the basis of monetary outcomes and personal behavioral norms (which prevent most people from behaving in a completely selsh way) (Bolle, 1998, p. 86). Note that the double blindness was also given in the previously discussed experiments. In Bolles experimental game, 48 of 63 trustors (76%) decided to trust; they received an average payo of 79.2 DM. This does not dier signicantly from the payo from mistrust (80 DM) nor from the average trustors stated expectation of what trustees will return (79.7 DM). Note that this expectation is signicantly lower than what they would regard as an appropriate return (103.9 DM). With regard to rationality and moral rules etc., it is interesting to note that 69.8% of the trustors chose a strategy matching their expectation: they refrained from trusting when they expected a reward of less than 80 DM and vice versa. Furthermore, two moral regimes seem to guide the trustees behavior. For 85%90% of the player B subjects, the DM 80 which player A has invested seems to be the cornerstone of their moral obligation for rewarding; most of the other players B do not seem to accept any obligation at all, but pay on the basis of mercy (Bolle, 1998). An analysis of the trustees written statements justies this conjecture as there is either an obligation to pay at least 80 DM, or there is no obligation at all. According to Bolle [t]he rewarding trust game shows that trusting without complete and enforceable contracts need not be irrational. Trust is widespread and can even be found in situations of anonymous interaction. Each investors trust might be exploited, but on average trust is not inferior to mistrust.

8 Besides this, the instructions were shortened and a questionnaire was included to reduce the danger of confusion on the part of subjects.

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Cox (1999) carried out an experiment to test whether sending and returning money are motivated by trust and reciprocity or by other-regarding preferences. To do so, he compares the results of three dierent treatments, each one corresponding to a particular game. Treatment 1 is the standard investment game of Berg et al. (1995), treatment 2 is a dictator game in which player B cannot return anything to player A, and treatment 3 is another dictator game where B is the dictator, the A-player receives as endowment the average amount that was kept by the A-players in treatment 1 and the B-player receives an additional endowment corresponding to the average tripled amount invested by the A-players in treatment 1. Players in treatment 3 do not know that their endowments are determined by the subjects decisions in treatment 1. Comparing these treatments allows to isolate trust and reciprocity. Cox estimated the following models with a tobit regression:
F Si a b1 DA i c1 Di ei ;

1 2 DF i

Ri a b2 Di Si c2 Si ei ; DA i

equals 1 for treatment 1 and 0 for treatment 2, equals 1 for Female where subjects and 0 for Male subjects, and Di equals 1 for treatment 1 and 0 for treatment 3. The estimate of b1 turns out not signicantly dierent from zero, revealing that there is no evidence for trusting behavior. Cox attributes the fact that A-players invest roughly the same amount in treatment 2 as in treatment 1 to other-regarding preferences. The estimate of b2 is not signicantly dierent from 1. This result allows us to reject the hypothesis that B-players are motivated by positive reciprocity. However B-players on average returned more than the amount sent by A in treatment 1 (for which reciprocity was feasible), while they gave less than this amount in treatment 3 (for which a positive amount given to A can be explained by other-regarding preferences). Therefore reciprocity accounts at least in part for the amount returned by the B-player. Cultural dierences are examined by Buchan, Johnson, and Croson (2000). They nd that (low trust) Korean and (high trust) Japanese student subjects do not send more than US student subjects, and that Chinese subjects send only weakly more than US student subjects. These ndings contradict Fukuyamas conjecture according to which the level of trust is higher in Japan and the US than in China and Korea. According to Fukuyama, trust is higher in Japan and the US because hiring of nonrelated managers in rms is common in those countries, while in China and Korea rms mainly hire their managers within the owners family. This restrains the development of large-scale businesses in contrast to what happened in Japan and the US.

4. Experimental procedures The subjects in our French/German experiment were recruited from the student population at the University of Strasbourg and at the University of Freiburg. These

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two cities are very close to the FrenchGerman border: Strasbourg is right on the border and Freiburg is only a few kilometers away from the border. Since, due to this geographic proximity, there might be some cultural assimilation by frequent mixing, our choice of samples provides a strong test in the case we should nd a signicant dierence in S and R in the two cities. In Freiburg a subject pool was built by advertising for the specic experiment on campus. In Strasbourg the subjects were recruited by phone from an existing subject pool. Their nationality and their major were controlled. Participants were asked by monitors about their nationality and where they had been living most of their lives; subjects who did not belong to the national group were excluded from the experiment and received a fee for having shown up. Each session lasted from 60 to 90 minutes. In each country, three sessions with 10 subject-pairs were organized. Upon arriving at the experimental lab, subjects were assigned randomly either to room A to participate in the role of player A, or to room B to participate in the role of player B. To implement the investment game, we used a double-blind procedure similar to the one used by Berg et al. (1995). 4.1. The double-blind procedure Our implementation of the investment game involves passing envelopes between rooms A and B, with the experimenter in room C recording the decisions and manipulating the amounts given. In each room there was one randomly chosen subject who was not participating in the experiment but assisted the experimenter. Another subject was randomly selected as supervisor: his role was to supervise the experimenter in handling the money. Room A subjects were assigned to the role of trustor and room B subjects to the role of trustee. In each room the assistant rst read aloud the instructions 9 that each participant had received upon entering the room. The instructions were the same for all subjects, whether in the role of player A or player B. Participants then lled out a short questionnaire to make sure that the procedure was well understood. Then, the answers of each individual subject were checked and corrected. As soon as this was completed, subjects were called up one by one, in an order chosen by the assistant, to go to the back of the room and take a large unmarked opaque envelope out of a box. When all participants were again seated at their places, they opened their envelopes and checked the contents. In room B each envelope contained 10 one-Euro-bills. 10 In room A each envelope contained a small lettered opaque envelope and 10 oneEuro-bills. A secret code (the letter A followed by a number between 1 and 10) printed on the smaller envelope served as identication for the anonymous matching process with player B. 11

The instructions are available upon request in either French or German. As no real Euros was issued until 2002 we developed some play-money ourselves. The same kind of bills were used in Strasbourg and Freiburg, the bills being replaced after each session. 11 Each code was unique and known only to the subject.
10

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The main part of the investment game started with the assistant in room A asking the subjects to go, one by one, to a privacy preserving partition in the back of the room, and put the money they want to invest in their small lettered envelope and throw the envelope anonymously into a return box. The Euros that they decided to keep were put in the larger envelope. After completion of this process the assistant took the box outside the room where the supervisor was waiting to carry it to room C. Under the control of the supervisor, the experimenter opened the envelopes, one by one, recorded the decision of each player A, tripled the number of Euros in each envelope and put the corresponding amount of Euros in a small opaque envelope, coded B1 to B10. The coded small envelopes were put into another box, which the supervisor carried to room B. In room B, one by one, in an order chosen by the assistant, each subject went to the back of the room to randomly take one of the small lettered envelopes out of the box, and then returned to his place. After each player B had received his envelope (identifying him with the secret code marked on it), they individually returned with the large and the small envelope to the privacy preserving partition in the back of the room. There, each player opened the small lettered envelope, checked its content, put the money he wanted to return to player A back into the small lettered envelope and threw it into a return box. The money kept was put into the large envelope. After every subject had made his decision the assistant took the box with the small lettered envelopes and handed it to the supervisor waiting outside room B. The supervisor carried the box to room C. Under his control, the experimenter opened the small lettered B envelopes, recorded the content and put it into the corresponding small coded A envelopes. The A envelopes were put back into the box and then carried again to room A, where each subject individually took the envelope corresponding to his secret code. The subjects opened the envelope and checked the amount returned. The conversion phase 12 at the end of the experiment started with the assistants in both rooms calling upon the subjects to put the money earned during the experiment in their large envelope and to write their code upon the large envelope. One at a time and in an order chosen by the assistant the subjects went to the back of the room to throw their large envelopes into a return box. The boxes from both rooms were handed to the supervisor waiting outside the rooms. The supervisor carried the boxes to room C, where the Euros were replaced by real local money. While the money was converted the subjects were asked to make, anonymously on a plain sheet of paper, any comments they wished. The boxes containing the large envelopes marked by the subjects identication codes were brought back into the rooms, where each subject was called, one at a time, to get his large envelope, check the content and leave the room individually.

Our procedure diers to that of Berg et al. in that in our setting the play-money of all players had to be changed into real money and was returned anonymously via our system of envelopes instead of a system of lockers and keys.

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4.2. Cross-cultural precautions We had to reach equivalence in the two countries concerned, in the following areas: (1) instruction sheets for player A and B; (2) amounts of cash in the investment game in both countries; (3) monitoring that players were representative of their national groups at large. The text of instruction sheets for A and B was rst written in French, then translated into German, and the consistency of meaning between the source and target versions was checked as is usual in cross-cultural research (Van de Vijver & Leung, 1997). It was dicult to reach similar show-up fees as well as similar partitions of this fee since France and Germany had dierent currencies. It was decided to use the Euro in both countries, that is, the single European currency which was adopted in early 1999. By choosing the Euro it was possible to guarantee that the players on both sides played with the same units as well as for (almost) the same amounts of real money. 13 Since the beginning of 1999 prices in both countries have been stated in Euros as well as in local currency. At the time of the experiment, subjects therefore were quite acquainted with the new common currency. Rather than real banknotes, which were not available before January 2002, subjects were given Euro-banknotes prepared by the experimenters which were cashed later at the xed ocial rate (1 Euro 2 DM 6:6 French Francs).

5. Results We summarize our results by considering separately trust, reciprocity and performance. Except where stated otherwise, all signicance tests reported in Sections 57, are based simultaneously on the t-test and the non-parametric MannWhitney test, at the 5% signicance level. 5.1. Trust In both counties 97% of the A-players sent positive amounts to the B-players (in each country only one of the A-players decided to send nothing). Table 1 gives the average investments in the two countries over the three sessions. The average trust level is larger in Germany than in France. The dierence is signicant at the 1% level (one sided). We conclude that the trust level, measured by the amount sent by player A is higher in Germany than in France. Fig. 1 shows the frequency distribution of the investment levels. Obviously the difference between France and Germany is essentially due to the fact that in Germany the frequency of A-players who invest their total endowment (13/30) is much higher than in France (4/30).

13 In fact, our conversion rates of 2 DM and 6.60 French Francs for one Euro are quite close to the exchange rates of 1.95583 DM and 6.55957 for one Euro xed at the beginning of 1999.

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Table 1 Average investments (Euros) Sessions Session 1 Session 2 Session 3 Mean France 4.4 4.8 3.5 4.2 Germany 6.2 6.7 7 6.6

14 13 12 11 10

Number of observations

9 8 7 6 5 4 3 2 1 0 -1 0 1 2 3 4 5 6 7 8 9 10 11 France Germany

Fig. 1. Frequency distribution of investments.

Table 2 Average returns in % of amounts received Sessions Session 1 Session 2 Session 3 Mean France 35 38 44 39 Germany 45 41 44 43.3

5.2. Reciprocity In France, B-players who received strictly positive amounts from the A-player returned, on average, 39% of the amount received (see Table 2). In Germany, the per-

M. Willinger et al. / Journal of Economic Psychology 24 (2003) 447466 Table 3 Summary of the tobit regression for French and German data Variables Si DG Intercept Coecient 1.214 0.581 )0.527 Standard error 0.207 0.703 0.703 z 5.865 0.828 )0.750 P > jzj 0.000 0.408 0.453

461

centage is slightly higher (43%), but the dierence with France is not signicant at the 5% signicance level (two sided). We conclude that the level of reciprocity is equal in both countries. Surprisingly, in both countries, there is no correlation between the amount invested by player A and the percentage returned by player B (the Spearman Rank correlation between these two variables is never signicant at the 5% level), a result that is in keeping with Berg et al. (1995). 14 The correlation between the amount invested by player A and the absolute amount returned by player B is always signicant, though. For the pair of players i, let Si be the amount invested by player A and Ri the amount returned by player B. Furthermore, let DG be a variable taking value 1 for a German pair of players and value 0 for a French pair. We consider the following regression model: Ri a bS Si bG DG ei : b i be the true Note that Ri is a censored variable, since Ri 2 f0; . . . ;3Si g. Let R amount that player B would like to return if he were not constrained. The constraint b i is binding either below or above. If it is binding below, player B would like to on R b i is binding above, player B return less than zero when Si 0. If the constraint on R would like to return more than 0 if Si 0 and more than 30 if Si 10. In the rst case player B would like to punish player A for not sending a positive amount, and in the second case player B is altruistic, in the sense that he would like to increase player As payo without any compensation. Related experimental evidence (e.g., Fehr, G achter, & Kirchsteiger, 1997; Fehr & G achter, 2000) provides more support in favor of the punishment hypothesis rather than the altruistic hypothesis. We thereb i < 0. We run a tobit fore assume for the regression that Ri is left censored: Ri 0 if R estimate of the above model, allowing for heteroskedastic errors. As in Cox (1999) we assume a multiplicative model for heteroskedasticity, ri rehSi . The parameter h is estimated on the basis of the Log-transformation: Log ri Log r hSi . Table 3 summarizes the results of the regression. The intercept a and the dummy variable DG are not signicant. The slope coefcient is signicantly dierent from 0 and signicantly dierent from 2, which implies that players B did not act in a completely selsh way (bS 0) nor in a completely equitable way, which would have required payos be split equally (bS 2). This is
14 This contrasts, however, with the results of Meidinger et al. (1999) who found signicantly positive correlation in their data.

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in line with previous ndings by Cox for his own data as well as for the data of Berg et al. Furthermore we could not reject the null hypothesis that bS 1 (p > v2 0:3013). On average, trust was not misplaced in either of the two countries. 20 of the 29 Aplayers in France and 21 of the 29 A-players in Germany, who decided to invest, were better o as a result, receiving a payo greater than 10 Euros. However, we observe in both countries that some of the B-players who beneted from positive investment kept everything (ve in Germany versus three in France). It is interesting to note that in three of the ve cases for which this happened in Germany, the level of trust was maximum (i.e., player A invested 10 Euros). In contrast, in France the zero reciprocity level was observed only for investment levels below 5, while in cases of full trust, the level of reciprocity was always larger than 60%. In France, 14 of the 30 B-players returned between 1/3 and 2/3 of the amount received, compared to 10 of 30 in Germany. Note also that the percentage returned by player B has a slightly higher standard deviation in Germany than in France. 5.3. Performance The average total gain for the two players is equal to 33.27 Euros in Germany and 28.47 Euros in France, a dierence which is signicant at the 1% level (one sided). The higher level of trust in Germany led to higher performance as measured by the total gain. Because of the nature of the game, this of course is an immediate consequence of the higher level of trust. The average gain of player A is equal to 11.2 in France against 11.8 in Germany, a dierence which is not signicant (double-sided). Because the average level of reciprocity is the same in both countries and since German A-players invest more, B-players can make signicantly larger gains in Germany (1% one-sided). The average gain of B-players is equal to 17.2 Euros in France and 21.5 Euros in Germany. The additional performance gain due to a larger level of trust in Germany accrues almost entirely to B-players.

6. Comparison with Berg et al. Our data can be compared to Berg et al. (1995), since their initial endowment of $10 of the two players is roughly comparable to our 10 Euros. At the time when Berg et al. ran their experiments (JulyAugust 1993), the average interbank exchange rate between US Dollars and the European currency 15 was 0.88, while it was 0.94 during the period when we ran our own experiments (MayJune 1999). In the Berg et al. experiment, A-players sent on average $5.2 to the B-players, which is intermediary between France ($4.2) and Germany ($6.6). While the level of trust does not dier signicantly between France and USA, German A-players invest signicantly, although slightly, more than USA-players. The level of reciprocity

15

At that time of the experiment the European currency was called ECU.

M. Willinger et al. / Journal of Economic Psychology 24 (2003) 447466 Table 4 Average individual and total gain Average gain Player A Player B Total France () (30) 11.2 17.2 28.5 Germany () (30) 11.8 21.5 33.3 USA ($) (32) 9.5 20.8 30.3

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Table 5 Summary of the tobit regression for French, German and US data Ri Si DG DU Constant Coecient 1.185 0.586 )0.819 )0.462 Standard error 0.166 0.725 0.674 0.624 z 7.111 0.809 )1.215 )0.740 P > jzj 0.000 0.419 0.224 0.459

of the US B-players (30% on average) is lower than in the two European countries, but the dierence is signicant only for the comparison with Germany. Concerning eciency, the average total gain for the US data is equal to $30.3, an intermediate score between the French ($28.5) and the German ($33.27) average total gain. The dierence in the levels of total gain is not signicant for the comparison between France and USA, but total gain is signicantly larger in Germany than in the US. Individual gains for A-players are not signicantly dierent in the three countries, but B-players earn signicantly less in France than in the USA, while the null hypothesis of equal gains for B-players in Germany and in the USA cannot be rejected. Again, we observe that the larger eciency level due to a higher level of trust favors B-players. Table 4 summarizes the average individual and total gains for the three countries. Similar to the model presented in Section 5.2 above, we estimated the following model on the basis of a tobit regression allowing for heteroskedastic errors: Ri a bS Si bG DG bU DU ei where DU is a dummy variable taking value 1 for a US pair of players and 0 elsewhere. The dummy variable DF for French pairs of players is not taken into account since there are only two independent dummy variables (DF DG DU 1). Table 5 summarizes the results of the regression. The only signicant variable is the amount invested by player A. The dummy variables identifying the nationality are not signicant. We cannot reject the null hypothesis that bS 1 (p > v2 0:2667).

7. Intercultural experiment In the experiments presented above, we compare French and Germans playing the investment game with their own countrymen. Adler and Graham (1989) highlight

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that simple international comparisons may be fallacies when empirical designs only describe within-culture interactions. Adler and Graham show that negotiators tend to adapt their behavior in intercultural negotiation and do not behave completely as predicted from observations in intra-cultural settings. Their empirical ndings show that French-speaking Canadians are more oriented toward problem solving when negotiating with English-speaking Canadians than they normally are among themselves. Therefore, a more robust test of the FrenchGerman dierence in trust levels should be based on an intercultural design, that is, French subjects interacting with German subjects and vice-versa. If we still observe a signicant dierence in trust levels between France and Germany with an intercultural design, this provides us with additional supportive evidence indicating that German A-players tend to trust more than French A-players. The purpose of this experiment was therefore to test whether there is a reputation of trustworthiness for German and French student subjects. If German subjects have the reputation of being trustworthier than French subjects, then we should observe larger amounts sent by French subjects to German subjects, compared to the amounts sent by French subjects to other French subjects. Similarly, if French subjects have the reputation of being less trustworthy than German subjects, we should observe larger amounts sent by German subjects to other German subjects, compared to the amounts sent by German subjects to French subjects. Why could such reputation eects exist? According to Fukuyamas conjecture the level of trust is higher in Germany than in France, for various reasons linked to history, culture, religion etc. Trusting behaviour is therefore embodied as a social norm in the institutions of the society. But to sustain such behaviour over many generations requires that trust be positively rewarded, i.e. reciprocated or honoured by the members of the society. This means that a more trustful society should also be a more trustworthy society. In order to test for such reputation eects the investment game was run simultaneously in two dierent sites (the University of Strasbourg and the University of Karlsruhe). 16 Two treatments were organized: in the FrenchGerman treatment, each French A-player was randomly matched with a German B-player to play a one-shot investment game. In the GermanFrench treatment player A was German and player B was French. The instructions were exactly the same as in the previous experiment, except that subjects were told that the subject player with whom they would be matched was a native of the other country. It was explained to the subjects that their decisions would be transmitted by the experimenter in one country to the experimenter in the other country through the Internet. 17 At each site, Strasbourg and Karlsruhe, 20 participants were assigned to the role of player A and 20 particNote that the Karlsruhe is 133 km distant from Freiburg, close to the FrenchGerman border. The distance between Karlsruhe and Strasbourg is 81 km and the distance between Freiburg and Strasbourg is 86 km. 17 The two experimenters were also in contact by phone and by fax to check good reception of the messages.
16

M. Willinger et al. / Journal of Economic Psychology 24 (2003) 447466 Table 6 Results of the intercultural experiment Treatment A French, B German Amount invested by A Percentage returned by B 5.6 35 A German, B French 7.2 40

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ipants to the role of player B, i.e. 20 subject-pairs participated in each treatment. Table 6 summarizes the main results. German A-players invest signicantly more than the French A-players. The percentage returned by the B-players, however, is not signicantly dierent between the two treatments. Furthermore, we found no evidence for dierences between intercultural treatments and the intracultural treatments reported in Sections 4 and 5 above. More precisely, for none of the two countries, is there a signicant dierence in the amount invested and in the percentage returned. French A-players tend to invest the same amount whether player B is French or German. Similarly German A-players tend to send the same amount to French B-players than they send to German B-players. Similarly, player B returns the same percentage to player A whether player A is German or French. We conclude from these observations that there is no indication of reputation for trustworthiness in our data, but that German student subjects exhibit a higher level of trust, both in the cross-cultural experiment of Section 7, and in the experiment discussed in Section 5. 8. Conclusion Based on the investment game, we compared the level of trust, performance and reciprocity, for German and French subjects. According to Fukuyamas conjecture, trust and performance are higher in the German society. We observed, in our experimental data, that German subjects invest signicantly more than French subjects, leading to signicantly higher performance (as measured by the joint payo of the two players) in Germany. Therefore, our experimental data does not reject Fukuyamas conjecture. However, we observe also that the level of reciprocity does not dier signicantly between the two countries. The additional performance obtained with trust mainly increased the trustees payos. Furthermore, based on a cross-cultural experiment, we do not nd any evidence for reputation of trustworthiness in our data. Acknowledgements We thank Phu Nguyen Van for his assistance and Franc ois Cochard for his comments. An anonymous referee provided valuable suggestions. Financial support by the Sonderforschungsbereich 504 at the University of Mannheim and by the FNEGE Foundation are gratefully acknowledged.

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