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Published in: Social Choice and Welfare 1/2024

06-08-2023 | Original Paper

Escape poverty trap with trust? An experimental study

Authors: Kenneth S. Chan, Vivian Lei, Filip Vesely

Published in: Social Choice and Welfare | Issue 1/2024

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Abstract

In this study, we introduce an experimental approach to study the causal impact of trust on economic performance. We ask if trust can serve as a coordination device to help poor economies escape a poverty trap and, if so, whether such an impact is universal regardless of their initial levels of development. We follow Lei and Noussair (2002, 2007) and design a decentralized market economy that has the structure of an optimal growth model where output is allocated between consumption and saving over a sequence of periods. As in Lei and Noussair (2007), a threshold externality is introduced to generate two equilibria where the Pareto-inferior equilibrium is considered as a poverty trap. We find that trust matters in that it is more likely for high-trust economies, generated with an endogenous matching procedure, to escape the poverty trap. But we also find that the likelihood to escape depends partially on the initial endowment condition. Trust has a much weaker impact on the economies whose initial capital and output are below the Pareto-inferior equilibrium, suggesting that formal institutions and/or policy measures may be needed to engineer a “big push” for these least developed economies.

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Footnotes
1
See Algan and Cahuc (2013) for a review of the recent attempts to address this issue in the literature.
 
2
See Amano et al. (2014) for a discussion of the pros and cons of using experimental methodology to study macroeconomic issues.
 
3
We do not exclude reverse causality in that trust can be further enhanced or mitigated after an economy succeeds or fails to escape the poverty trap. As a result, we will focus our data analysis mostly on the beginning of the growth game in Sect. 5.
 
4
As noted in Lei and Noussair (2002), the main drawback of setting \(\delta =1\) is that it risks the possibility of having zero capital stock in any given period if the economy consumes all its output. Without being able to produce output and re-accumulate capital, the economy would cease to exist. Therefore, having \(\delta =1\) may make it more difficult for our experimental economies to reach a steady-state equilibrium. Yet, technically speaking, this parameter choice also renders a more straightforward decision environment for our human subjects. Therefore, we continue the practice from Lei and Noussair (2002, 2007) and Capra et al. (2009) by choosing \(\delta =1\).
 
5
How we divided the production and utility schedules among five individuals will be detailed in Sect. 3.1.2 below.
 
6
See Lei and Noussair (2007) for more details about the competitive equilibria noted here.
 
7
The minimum wage in 2011 was HK$28 or US$ 3.60 per hour, which was paid by most of the fast food restaurant chains in Hong Kong.
 
8
The fact that the experiment consisted of two parts was written in the instructions and thus common knowledge to all participants. Nevertheless, other than knowing that the grouping determined in period 10 of Part I would be used to determine their group affiliation in Part II, subjects did not have any information regarding the exact contents of Part II until after Part I was completed. See Sect. 3 for the grouping procedure.
 
9
The corresponding initial capital stocks were 6 and 19, respectively. Both levels were below the threshold capital level of 31 that would permit economies to use a more efficient technology to produce. We departed from Lei and Noussair (2007) by equally dividing the initial aggregate output, rather than capital, among five group members. Since different agents were endowed with different production capabilities, having the same initial capital stock would immediately result in income inequality that might hinder economic growth in our experiment. We therefore decided to start with a more homogenous income distribution than in Lei and Noussair (2007).
 
10
This decentralized market setting was first introduced, along with a treatment called Social Planner, in Lei and Noussair (2002) to study the Ramsey-Cass-Koopmans optimal growth model. In the Social Planner treatment where each subject took on the role of a social planner, the experiment was designed to be as close as possible to the literal formulation of the model. In the Market treatment, however, the design departed from the literal formulation with a double auction mechanism that is known in the experimental literature to be extremely effective in enhancing the efficient allocation of resources and, as a consequence, directing a decentralized market toward equilibrium. Of course, to promote the use of the market, gains from trade must exist. In their experiment, this was done through endowing agents with different production and utility functions. We adopt the same procedure to ensure heterogeneity among individual agents. This will be explained in the next subsection entitled Individual Production and Utility Function.
 
11
Overall, only three substitutes were recruited in this experiment.
 
12
This was similar to the voluntary association mechanism used in Page et al. (2005), although subjects in Page et al. only needed to make a regrouping decision every three periods.
 
13
If a participant received 0 from his trustor in stage 1, a N/A was shown on the screen as his “% Retuned.”.
 
14
For each possible group of 5 subjects, the computer summed up the members’ mutual ranking decisions. It performed this procedure for all 3,003 possible grouping combinations to find the smallest sum in order to form Group A.
 
15
After excluding Group A’s five members from the remaining ten subjects’ ranking lists, the computer had to first rescale the ranks down to 1–9 for each individual. Then, it repeated the same procedure as described in footnote 14 to find the smallest sum among 252 possible grouping combinations to form Group B.
 
16
The grouping procedure was explained in the instructions to the subjects.
 
17
Since some subjects moved from one group to another, we cannot treat each group as an independent observation. As a result, Wilcoxon matched-pairs signed-ranks tests are more appropriate for the pair-wise comparisons here.
 
18
We use the percentage amount sent rather than the absolute amount sent in order to directly compare the relative importance between trust and trustworthiness.
 
19
Note that subjects ranked the other 14 participants from 1 (the highest and most favorable rank) to 14 (the lowest and least favorable rank).
 
20
As shown in Figs. 4 and 5, the amount sent or percentage returned in the endogenous matching groups suffers from a considerable end-game effect in period 10. Therefore, we chose to use the average percentage sent or returned between periods 9 and 10 to mitigate the impact of the end-game effect. Note that the group composition in period 9 was not exactly the same as that in period 10 (the number of new group members is, on average, 1.27 in period 10). Nonetheless, we made such a decision based on the assumption that the norm would remain stable even with a slightly different group composition between the last two periods.
 
21
We take each group as an independent observation unit.
 
22
Lei and Noussair (2007) and Capra et al. (2009) define escaping the poverty trap as having the aggregate capital stock significantly different from the Pareto inferior equilibrium level.
 
23
A likelihood ratio test rejects the null hypothesis that the data are temporal independence (p-value < 0.0100).
 
24
As discussed in Sect. 2.1, our economies, if guided by a benevolent social planner, should conserve most, if not all, of its output in the first three periods in order to escape the poverty trap. Therefore, our primary interest in the following analysis is on economies’ behavior in duration 1.
 
25
By grouping three or more periods into one time interval, we are assuming that the probability that an economy will escape the poverty trap remains constant within periods 1–3, 4–6, etc. See Jenkins (2004) for more details on the characterization of duration dependence in discrete time hazard models.
 
26
A GLS random-effects model allows us to take advantage of the cross-sectional and time-series variation in the data. Furthermore, since the group trust generated in Part I of the experiment might have a path-dependent impact, depending on how the growth game evolved over time and whether or not it was repeated more than once, we believe a random-effects model is more appropriate than a fixed-effects model for our data.
 
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Metadata
Title
Escape poverty trap with trust? An experimental study
Authors
Kenneth S. Chan
Vivian Lei
Filip Vesely
Publication date
06-08-2023
Publisher
Springer Berlin Heidelberg
Published in
Social Choice and Welfare / Issue 1/2024
Print ISSN: 0176-1714
Electronic ISSN: 1432-217X
DOI
https://doi.org/10.1007/s00355-023-01480-4

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