A test of loyalty

Foucart, Renaud and Tan, Jonathan H.W. (2024) A test of loyalty. Theory and Decision, 97 (1). pp. 109-137. ISSN 0040-5833

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Abstract

We propose and test a model of loyalty in games. Players can mutually maintain loyalty by working towards a common goal that is pareto-superior to any Nash equilibrium without it. Loyalty imposes a psychological cost on defecting in an ongoing cooperation, which is thus sustained. We distinguish loyalty from reciprocity and explain how it complements guilt aversion with two dynamic games from a field experiment conducted in a Pakistani factory. The evidence supports the validity of loyalty, which has a stronger effect within than between groups.