Sanctioning and trustworthiness across ethnic groups: Experimental evidence from Afghanistan

Since social preferences towards individuals perceived as belonging to a different group are typically weaker, cooperation is more difficult in ethnically diverse settings. Using an economic experiment in Afghanistan, we show how the ability to impose financial penalties can help to overcome this. We use a trust game with two special features: investors communicate a desired back-transfer and, in some treatments, can choose whether to conditionally impose a small fine on trustees who do not comply with this request. We randomly paired subjects with either a co-ethnic or someone from a different ethnic group. We find that when investors do not have the ability to impose a fine, subjects are more trustworthy towards co-ethnics. When the fine is imposed by a co-ethnic, it has little effect. However, in cross-ethnic interactions, the fine increases trustworthiness, virtually eliminating in-group bias. Interestingly, this result is qualitatively similar when the fine is available to the investor but not used. These results suggest that institutions for enforcing cooperation are more effective when applied between, rather than within, ethnic groups, due to behavioral differences in how individuals respond to pecuniary sanctions.