The trust building process is basic to social science. We investigate it in a laboratory setting using a novel multi-stage trust game where social gains are achieved if players trust each other in each stage. And in each stage, players have an opportunity to appropriate these gains or be trustworthy by sharing them. Players are strangers because they do not know the identity of others and they will not play them again in the future. Thus there is no prospect of future interaction to induce trusting behavior. So, we study the trust building process where there is little scope for social relations and networks. Standard game theory, which assumes all players are opportunistic, untrustworthy, and should have zero trust for others is used to construct a null hypothesis. We test whether people are trusting or trustworthy and examine how inferring the intentions of those who trust affects trustworthiness. We also investigate the effect of stake on trust, and study the evolution of trust. Results show subjects exhibit some degree of trusting behavior though a majority of them are not trustworthy and claim the entire social gain. Players are more reluctant to trust in later stages than in earlier ones and are more trustworthy if they are certain of the trustee’s intention. Surprisingly, subjects are more trusting and trustworthy when the stake size increases. Finally, we find the sub-population who invests in initiating the trust building process modifies its trusting behavior based on the relative fitness of trust.

The use of linear wholesale price contract has long been recognized as a threat to achieving channel effciency. Many formats of nonlinear pricing contract have been proposed to achieve vertical channel coordination. Examples include two-part tariff and quantity discount. A two-part tariff charges the downstream party a fixed fee for participation and a uniform unit price. A quantity discount contract does not include a fixed fee and charges a lower unit price for each additional unit. Extant economic theories predict these contracts, when chosen optimally, to be revenue and division equivalent in that they all restore full channel effciency and give the same surplus to the upstream party assuming constant relative bargaining power. We conduct a laboratory experiment to test the empirical equivalence of the two pricing formats. Surprisingly, both pricing formats fail to coordinate the channel even in a well-controlled market environment with subjects motivated by significant monetary incentives. The observed channl effciencies were significantly lower than 100%. In fact, they are statistically no better than that of the linear wholesale price contract. Revenue equivalence fails because the quantity discount scheme achieves a higher channel effciency than the two-part tariff. Also, division equivalence does not hold because the quantity discount scheme accords a higher surplus to the upstream party than the two-part tariff. To account for the observed empirical regularities, we allow the downstream party to have a reference-dependent utility in which the upfront fixed fee is framed as loss andn the subsequent contribution margin as gain. The proposed model nests the standard economic model as a special case with a loss aversion coeffcient of 1.0. The estimated loss aversion coeffcient is 1.6, thereby rejecting the standard model. We rule out other plausible explanations such as parties having fairness concerns and non-linear risk attitudes.