CeDEx Brown Bag Seminar - Xiaoyu Zhou

Title: Trust Is Good -- Escrow Is Better: Can Mutual Deposit Payments Encourage Cooperation in Social Dilemmas?

Abstract: In environments where formal enforcement institutions are weak or absent, establishing trust and cooperation remains a major challenge. This paper introduces and experimentally tests a novel mutual escrow mechanism designed to facilitate cooperation in one-shot social dilemmas. Inspired by the historical practice of mutual hostage exchange, our mechanism requires both parties to deposit refundable fees into a joint escrow account, which are only returned if both parties agree post-interaction. In a laboratory setting, we compare treatments with no escrow, low deposit, and high deposit. We find that only high-value mutual escrow deposits sustain cooperation over time. The mechanism works not by inducing defectors to cooperate, but by encouraging would-be cooperators to remain cooperative, effectively stabilizing trustful behavior. Escrow destruction occurs rarely and only in response to defection, not out of antisocial motives. Our findings suggest that sufficiently valuable reciprocal commitments can serve as self-enforcing governance tools, fostering cooperation without requiring third-party enforcement.