Microsoft powerpoint - luporini - comment on becchetti

The Economics of the “Trust Game
Corporation”
The paper poposes a new representation of the firm based on trust games + production of relational goods 1) Production depends on the combination of non-overlapping firm represented as series of supperadditive trust games This helps explaining firm practices, e.g.: • Why firms spend money in order to enhance relations • Why pay for performance schemes are less widespread • Why incentive schemes based on single winner Production Trust Game
NS: competition between A and B based on individual contributions h , h – contribution of the looser is lost S: if B abuses (appropriates A’s contribution) h + h is produced if B does not abuse h + h + e is produced and shared h + h < e cooperation:
h + h > e non cooperation:
in any case there is a social surplus loss
High superadditive component e induces NA from B after S Presence of relational good lowers the value of e that makes NA profitable for B becuse abuse results in loss ofrelational good(both present and accumulated) Production trust game used to represent situation between Comments:
• Seems more appropriate to represent two independent
individuals than two owners of a firm (e.g two architects)
– why should the “looser” contribution be lost with NS inside
the firm?
Independent individuals might value independence more Trust game in which players get their contribution in case of • (S,A) equilibrium when e < h + h and h < h could be - considering the psychological cost of being abused, i.e. - modifying the payoffs in case of NS, e.g. considering the case where no contribution is lost and payoffs are (h ,h ) Repeated Game
• Two periods: equilibrium different from the repetition of
• Infinitely repeated: Folk Theorem applies if h >h :
cooperation for δ high enough but equilibrium is not renegotiation proof after abusing B may offer a side payment to A conditional on Comments:
• Relational good should ease cooperation even in the • Non regotiation proofness seems to depend on trigger strategy – guess: there may be other equilibria (based on strategy which alternate punishment and cooperative phases) that might be renegotiation proof Imperfect information:
• Each player is uncertain wether the other player values the relational good but positive valuation from both is needed to enjoy the good Uncertainty about the relative value of h does not alter the results but eliminates (S,A) equilibrium when h <h Players do not own the firm:
• Pay for performance schemes are neutral in trust games but they raise the level of the relational good needed to obtain cooperation • Promotions based incentive system (being a single winner tournament) offset incentive to cooperate because the trustee always abuses after S - result mitigated by the presence of relational good Comments:
• Pay for performance schemes are not needed in this framework (neutral) – they are usually related to effort motivation which should be modeled – probably leading to trade-off between effort motivation and cooperation • Promotions tournaments are usually proposed for workers in the same position, i.e. for workers whose performancescan be readily compared not for individuals with“overlapping tasks” Presence of relational goods very important in explaining workers’ and consequently firms’ behavior Trust game appropriate to study cooperation among workers but trust relationship are usually intertwined: repeated game with individuals alternating in trustor / trustee position – would this enhance cooperation? Individuals differ in their valuation of relational goods

Source: http://www.econometica.it/allegati/IEA%20TRENTO/Luporini%20-%20Comment%20on%20Becchetti.pdf