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This experiment studies the internal and external effects of communication in a multilevel trust game. In this trust game, the first player can send any part of his endowment to the second player. The amount sent gets tripled. The second player decides how much to send to the third player. The amount is again tripled, and the third player then decides the allocation among the three players. The baseline treatment with no communication shows that the first and second players send significant amounts and the third player reciprocates. When we allow communication only between the second and third players, the amounts sent and returned between these two increase. The new interesting finding is that there are external effects of communication: the first player who is outside communication sends 60% more and receives 140% more than in the no communication treatment. As a result, social welfare and efficiency increase from 48% to 73%.


Working Paper 09-08



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