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, using a laboratory experiment where 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, i.e. have to rely on trust. We permit either the proposer or responder to make the game choice and analyze how both roles choose between trusting and monitoring, what the ensuing effects of their choices are, and how they vary depending on who has chosen the game. We, also, experimentally vary the cost of monitoring and the responder’s conflict payoff. Since monitoring is usually costly, the amount to share in Yes–No Games (YNG) can exceed that in Ultimatum Games (UG). Regarding the conflict payoff, it 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.