What you don’t know won’t hurt you: a laboratory analysis of betrayal aversion
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Recent research argues “betrayal aversion” leads many people to avoid risk more when a person, rather than nature, determines the outcome of uncertainty. However, past studies indicate that factors unrelated to betrayal aversion, such as loss aversion, could contribute to differences between treatments. Using a novel experiment design to isolate betrayal aversion, one that varies how strategic uncertainty is resolved, we provide rigorous evidence supporting the detrimental impact of betrayal aversion. The impact is substantial: holding fixed the probability of betrayal, the possibility of knowing that one has been betrayed reduces investment by about one-third. We suggest emotion-regulation underlies these results and helps to explain the importance of impersonal, institution-mediated exchange in promoting economic efficiency.
KeywordsBetrayal aversion Risk Trust Emotion regulation
JEL ClassificationC91 D03 D81
We thank Ernst Fehr and Benjamin Schoefer for a valuable discussion that led to the experiment design reported in this paper. For helpful comments and suggestions, we thank Omar Al-Ubaydli, Vernon Smith, Virgil Storr, Bart Wilson, Erte Xiao, Richard Zeckhauser and participants in research seminars at ICES, the Mercatus Center, George Mason University, University of Lyon, University of Munich, University of Zurich, the International ESA 2008, and the SEA meetings 2008. Kail Padgitt and Adam Smith provided capable laboratory assistance. We gratefully acknowledge research support from the International Foundation for Research in Experimental Economics and the National Science Foundation Research Grant SES-0851250.
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