To support trust and trustworthiness: punish, communicate, both, neither?

Abstract

We examine the effects of punishment, communication, and their interaction on trust and trustworthiness. Our findings suggest that, when communication alone is available as an option for the trustor, using it roughly doubles the ability the trustor has to elicit trustworthiness, so communication is not cheap talk. When punishment alone is available, a punishment threat has no significant impact on the marginal ability of trust to elicit trustworthiness. If the two mechanisms are available and implemented together, the choice to punish completely cancels out the positive effect of the choice to communicate. For policy, these findings stress the importance of communication relative to contracts enforced with material penalties.