The Economics of the "trust game corporation"

We conceive firm productive activity as being crucially determined by the performance of complex tasks which possess the characteristics of trust games. We show that in trust games with superadditivity the non cooperative solution yielding a suboptimal firm output is the Subgame Perfect Nash Equilibrium (SPNE) of the uniperiodal full information game when i) the trustor has superior stand alone contribution to output and ii) the superadditive component is inferior to the sum of trustee and trustor stand alone contributions to output. We show that, if relational preferences of the two players are sufficiently high, the result is reversed. We also document that the Folk Theorem applies to the infinitely repeated game, even in absence of relational preferences, but the enforceable cooperative equilibrium is not renegotiation proof. We finally show that the cooperative equilibrium is not attainable under single winner tournament schemes and that steeper pay for performance schemes may crowd out information sharing in presence of players preferences for relational goods. Our findings help to explain why firms are reluctant to use pay for performance and tournament incentive schemes and why they invest money to increase the quality of relational goods among employees.