Carry a big stick, or no stick at all: Punishment and endowment heterogeneity in the trust game

- We study the effect of costly punishment in a trust game with endowment heterogeneity.
- The effect of punishment depends on the investor's relative endowment.
- Punishment fosters trust only when the investor is wealthier than the allocator.
- Our findings are consistent with models of intrinsic and extrinsic motivation.

We investigate the effect of costly punishment in a trust game with endowment heterogeneity. Our findings indicate that the difference between the investor and the allocator's initial endowments determines the effect of punishment on trust and trustworthiness. Punishment fosters trust only when the investor is wealthier than the allocator. Otherwise, punishment fails to promote trusting behavior. As for trustworthiness, the effect is just the opposite. The higher the difference between the investor and the allocator's initial endowments, the less willing allocators are to pay back. We discuss the consistency of our findings with social preference models (like inequality aversion, reciprocity), the capacity of punishment (i.e., the deterrence hypothesis) and hidden costs of punishment (i.e., models of intrinsic and extrinsic motivation). Our results are hardly coherent with the first two (inequality aversion and deterrence), but roughly consistent with the latter.