Unveiling the Effects of Communication and Information Structure on Trust and Reciprocity: An Experiment

ABSTRACT We experimentally examine the effects of cheap talk communication and information structure on trust and reciprocity in an infinitely repeated favor exchange game without immediate reciprocity. Theory predicts that full trust is not incentive compatible under private information, in contrast to the public information setting. Yet, our results show that while public information yields better outcomes, subjects under private information still exhibit substantial trust and reciprocity, achieving average payoff efficiency exceeding 80% of the maximum possible. Allowing subjects to communicate freely through unrestricted text chat reinforces this outcome, whereas structured communication using pre‐formulated messages has no significant effect. Content analysis suggests that free‐form communication is effective in enabling subjects to develop a better understanding of one another's messages. Strategy analysis indicates that subjects predominantly adopt the strategy that achieves the socially optimal outcome, even when it is not an equilibrium under private information. This provides a strategic rationale for the observed levels of trust and reciprocity and suggests that subjects are not always beholden to incentive‐compatibility. A sophisticated class of strategies explains a significant proportion of the data only under private information. This explains the lower frequency of trusting and reciprocal behaviors in this setting, as these strategies constrain such actions.