The effect of Trust on Innovation: A Behavioral Investigation

Trust and innovation are two central concepts in economics and social sciences. This dissertation investigates the relationship between trust and innovation in dyads faced with the choice between following an existing habit or attempting a novel approach. The design draws on the exploration-exploitation dilemma described by March (1991), whereby firms must decide whether to exploit existing capabilities or explore new solutions. Our dissertation is composed of three chapters. In the first chapter we review the possible definitions of trust and innovation and we stress their importance in behavioral economics and their role in promoting economic and social development. Later, we review the literature on the relationship between trust and innovation. In the second and third chapter we build experiments to study the effect of trust on innovation in dyads involved in a strategic interaction. After eliciting trust and risk attitudes through established experimental measures, participants first familiarize themselves with a task and then choose between repeating the known task or attempting a riskier, but potentially more rewarding novel task. In the treatment conditions, participants are matched with a partner and their payoff in the chosen task partially depends on the partner's choice, creating a prisoner's dilemma. In the third chapter, participants are also informed about the partner's level of trust prior to making their decision. Willingness to innovate is operationalised as a dummy variable equal to 1 when the new task is chosen. Overall, we do not find evidence of a correlation between trust and innovation. Participants innovate more when they are not matched with a partner and when they expect the partner to innovate. Instead, knowing that the partner is a high-trust type strongly increases willingness to innovate. This effect is partially mediated by higher expectations that the partner will also innovate, but it can also stem from social preferences or guilt aversion.