Sanctioning and trustworthiness across ethnic groups: Experimental evidence from Afghanistan

Since social preferences towards individuals perceived as belonging to a different group are typically weaker, cooperation is more difficult in ethnically diverse settings. Using an economic experiment Afghanistan, we show how the ability impose financial penalties can help overcome this. We use trust game with two special features: investors communicate desired back-transfer and, some treatments, choose whether conditionally small fine on trustees who do not comply this request. randomly paired subjects either co-ethnic or someone from ethnic group. find that when have fine, trustworthy co-ethnics. When imposed by co-ethnic, it has little effect. However, cross-ethnic interactions, increases trustworthiness, virtually eliminating in-group bias. Interestingly, result qualitatively similar available investor but used. These results suggest institutions for enforcing effective applied between, rather than within, groups, due behavioral differences respond pecuniary sanctions.