Beliefs and actions in the trust game: Creating instrumental variables to estimate the causal e¤ect1

In many economic contexts, an elusive variable of interest is the agent’s expectation about relevant events, e.g. about other agents’behavior. Recent experimental studies as well as surveys have asked participants to state their beliefs explicitly, but little is known about the causal relation between beliefs and other behavioral variables. This paper discusses the possibility of creating exogenous instrumental variables for belief statements, by shifting the probabilities of the relevant events. We conduct trust game experiments where the amount sent back by the second player (trustee) is exogenously varied by a random process, in a way that informs only the …rst player (trustor) about the realized variation. The procedure allows detecting causal links from beliefs to actions under plausible assumptions. The IV estimates indicate a signi…cant causal e¤ect, comparable to the connection between beliefs and actions that is suggested by OLS analyses. Keywords: Social capital, trust game, instrumental variables, belief elicitation JEL Classi…cation: C72, C81, C91, D84 We thank participants of the CEMMAP/ELSE workshop on distorted beliefs as well as seminar audiences at Autonoma, DIW Berlin, Exeter, Jena and Paris I for their comments. We are grateful for the …nancial support of the U.K. Economic and Social Research Council (ESRC-RES-1973) and the ELSE centre at UCL. The experimental sessions were conducted with the excellent support of Rong Fu, Tom Rutter, Brian Wallace and Mark Wilson. Contact: [email protected], [email protected], [email protected]