Efficiency and equity in negotiated resource transfers: Contributions and limitations of trust with limited contracts

We consider a case of water reallocation in Brazil, one which has numerous analogs elsewhere. To permit empirical study of the effects of institutions that can facilitate or restrict allocations, we conducted field experiments to explore trust's potential when resource contracts are limited, using a novel asymmetric-productivity ultimatum game with a final surplus-sharing step added. As a form of informal institution, trust could in principle make rights and contracts unnecessary. We observe whether trust in compensation is in fact expected and expressed. We also explore whether trust is exploited, and the effect of communication, within our two bargaining structures: (1) no communication; and (2) with a non-binding message concerning the surplus to be shared. We see that our participants both expect and express trust that some of the surplus will be shared. Trust raises total output and some surplus is indeed shared: those who trust gain a bit on average; and the more trust was shown, the more was shared. However, often the trust was barely repaid. Further, the messages-found to help in other research-had little impact and were often untrue. In sum, trust does matter but both efficiency and equity could well rise with complete contracts.

► Water allocation will be critical within climate adaptation; thus, so will institutions for water allocation. ► Experiments examining alternative institutions extend our evidence beyond the limits of observed cases. ► We conduct field experiments in Northeast Brazil to explore trust's potential when contracts are limited. ► We find trust is expected and expressed and efficient -- but barely repaid on average and often exploited. ► These findings suggest that both equity and efficiency could increase with clarity about terms of transfers.