DOES COMPETITION FOSTER TRUSTWORTHINESS? AN ESSAY ON THE EMERGENCE OF TRUST IN A THEORETICAL AND HISTORICAL PERSPECTIVE

Recent experimental studies argue that competition yields higher levels of buyer trust and seller trustworthiness, with this having obvious desirable consequences on market efficiency. The setting analysed in these studies basically resembles the classical trust game, with the first mover (the buyer) deciding whether to purchase an item, and the second mover (the seller) deciding whether to cheat (by providing a good of a quality different from the one promised or by not shipping the good). Experimental evidence suggests that introducing competition together with some information about sellers’ past choices, enhances market efficiency, given that sellers who behave dishonestly can be traced and punished with this creating strong incentives for sellers to be trustworthy (and for buyers to trust). In the first part of the paper we sketch a model to highlight the circumstances under which competition can plausibly foster trustworthiness. Differently from previous theoretical contributions we directly emphasize the time horizon of sellers as the key variable and highlight the dynamics which can lead to what we call a trustworthy equilibrium. The view that competition fosters trustworthiness is however made under critical scrutiny in the second part of the paper. Here we argue that technological changes have made competition neither a necessary nor a sufficient condition for trustworthiness. Historically this has opened the room to public regulation, investments in brand names and Corporate Social Responsibility (CSR).