Social norms and trust among strangers

We study the development of a social norm of trust and reciprocity via the contagious strategy as de ned in Kandori (1992) among a group of strangers. The players anonymously and randomly meet each other and play a binary trust game in the in nite horizon. In order to provide the investors with proper incentives to follow the contagious strategy, the su cient condition requires that there exist an outside option for the investors. The investors' payo from the outside option needs to converge to the payo from trust and reciprocity as the group size goes to in nity. We show that this su cient condition is also a necessary condition to sustain any sequential equilibrium in which the trustees adopt the contagious strategy. Our results imply that a contagious equilibrium only supports trust if trust contributes almost nothing to the investors' payo s. JEL Codes: C72, C73, D83