Trusting versus monitoring : an experiment of endogenous institutional choices

We investigate the problem of deciding between trusting and monitoring and how this decision affects subsequent behavior. In the experiment, subjects choose between the Ultimatum and the Yes-No Game. Despite the similarity of the two games in Ultimatum Games responders monitor the allocation proposal, while in Yes-No games responders react without monitoring, ie have to rely on trust. We analyze how subjects choose between trusting and monitoring, what are the ensuing effects of their choice, and how they vary depending on who has chosen between (proposer or responder). Since monitoring is usually costly, the amount to share in Yes-No Games (YNG) can exceed that in Ultimatum Games (UG). We experimentally vary the cost of monitoring and the responder’s conflict payoff. The latter can be positive or negative with the former rendering Yes-No interaction a social dilemma. According to our results proposers (responders) opt for trusting significantly more (less) often than for monitoring. Average offers are higher in Ultimatum than in Yes-No games, but neither UG nor YNG offers depend on who has chosen between games.