Transparency and Iterative Negotiations with Trust and Reciprocity

Abstract

Arrow (1974) noted the foundational role of trust in business transactions. More recently, Simons (2002) noted the high cost of lost trust; while Prusak and Cohen (2001) emphasize the investment in social capital. This study extends the trust in business literature by using the Berg et al. (1995) trust game to study the impact of transparency (i.e., complete information vs. incomplete information) and iterative negotiations (i.e., repetition of the game with the same participants) on the level of trust and trustworthiness. The key findings of the study are that transparency (complete information) significantly increases trusting behavior in one-shot interactions. This result persists in repeated interactions. Further, transparency appears important for reciprocity in one-shot interactions. These results suggest transparency is important in eliciting trust in business and SOX and similar legislations elsewhere are positive stimulants for economic activity.