Reciprocity in Multiple Principals - Agent Interactions: Experimental Evidence

Abstract

Agents frequently interact with multiple principals at the same time. An employee may have multiple supervisors, firms may engage in public-private partnerships or firms and individuals may borrow from multiple banks/peers. Digitalization further fuels the possibilities to simultaneously engage in economic transactions with multiple others around the globe (e.g., FinTechs offering financial advice or brokerage). This paper provides experimental evidence on reciprocity in interactions between multiple principals and one agent. In the experiments, one agent interacted with either one or multiple principals and needed to decide whether or not to reciprocate trust. An increase in the number of principals who trusted significantly undermined reciprocity. Principals, however, did not anticipate the decrease in reciprocity. Compared with bilateral principal - agent interactions, trust increased if principals had the possibility to pool risk. Observational field data from 113,000 loans funded by a varying number of investors on a crowdlending platform provides suggestive empirical evidence supporting the experimental results on reciprocity. The propensity of loan default is associated with the number of investors providing the credit. Situations in which multiple principals interact with a single agent may be considerably more risky compared to bilateral interactions. These findings have important implications for understanding, designing and structuring interactions in which multiple principals are involved.