Will banks promote trade? Equilibrium selection for the trust game with banks

Werner Güth () and Peter Ockenfels

No 1998,104, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: The Trust Game describes a situation where mutually beneficial trade is endangered by opportunistic exploitation. In the Trust Game with Banks this dilemma can be avoided by banks guaranteeing that sellers will be paid. This outcome is, however, not the only possible solution. Bank interference as an equilibrium outcome can coexist with another equilibrium according to which banks are not used at all. By applying the theory of equilibrium selection it is analysed which of the two competing outcomes should be expected, i.e. whether or not banks can indeed promote trade.

Date: 1998
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