Hurdles to Investment

Empirical research on international trade and investment has found that religion and culture affect economic interaction between countries even though these factors are not directly related to investment. Factors such as culture and religion may affect investment by providing information about someone's type or their likely behavior in an investment environment. Rather than relying on empirical measures of information and its effects, I adopt an experimental approach to test if information from an unrelated environment affects investment. To study if people use information from an unrelated environment, I design an experiment in which subjects learn about how another person played in multiple rounds of a prisoner's dilemma and then decide how much money to invest with this person. Investing money with another person increases its value, but the other person must return money to the investor for the investment to be profitable. In this set up the prisoner's dilemma is analogous to culture or religion, because information from a prisoner's dilemma is not directly related to the investment decision. The experiment allows me to test if information from one environment affects behavior in a different environment. The results of the experiment show that players invest significantly less when they are matched to a player who defects frequently in the prisoner's dilemma. This suggests that information from an unrelated environment can indeed affect investment behavior. My results provide insight into how information can affect investment between countries.