Trust and Growth

Why does trust vary so substantially across countries? This paper presents a general equilibrium growth model in which heterogeneous agents transact and face a moral hazard problem. Agents may trust those with whom they transact, but they also have the opportunity to invest resources in verifying the truthfulness of claims made by transactors. We characterise the social, economic and institutional environments in which trust will be high, and show that low trust environments reduce the rate of investment. The predictions of the model are examined empirically for a cross-section of countries and have substantial support in the data.

[1]  Howard Coonley,et al.  Making democracy work , 1941, Electrical Engineering.

[2]  M. Olson.  Rapid Growth as a Destabilizing Force , 1963, The Journal of Economic History.

[3]  M. Rothschild,et al.  Increasing risk II: Its economic consequences , 1971 .

[4]  G. Becker.  A Theory of Social Interactions , 1974 .

[5]  J. Stiglitz,et al.  Increases in risk and in risk aversion , 1974 .

[6]  Jerry A. Hausman,et al.  Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables , 1979 .

[7]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[8]  R. Townsend.  Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information , 1982, Journal of Political Economy.

[9]  A. Blinder,et al.  The Time Series Consumption Function Revisited , 1985 .

[10]  Mark S. Granovetter.  Economic Action and Social Structure: The Problem of Embeddedness , 1985, American Journal of Sociology.

[11]  L. Zucker.  Production of trust: Institutional sources of economic structure, 1840–1920. , 1986 .

[12]  R. Frank.  If Homo Economicus Could Choose His Own Utility Function, Would He Want One with a Conscience? Reply , 1987 .

[13]  Andrei Shleifer,et al.  Income Distribution, Market Size, and Industrialization , 1988 .

[14]  A. Greif.  Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders , 1989, The Journal of Economic History.

[15]  D. Charny.  Nonlegal Sanctions in Commercial Relationships , 1990 .

[16]  Benjamin E. Hermalin,et al.  Moral Hazard and Verifiability: The Effects of Renegotiation in Agency , 1990 .

[17]  A. Atkeson,et al.  International lending with moral hazard and risk of repudiation , 1991 .

[18]  Torsten Persson,et al.  Is Inequality Harmful for Growth? Theory and Evidence , 1991 .

[19]  L. Cosmides,et al.  Cognitive adaptations for social exchange. , 1992 .

[20]  Daniel Tsiddon.  A Moral Hazard Trap to Growth , 1992 .

[21]  Albert Marcet,et al.  Communication, commitment, and growth , 1992 .

[22]  Michihiro Kandori.  Social Norms and Community Enforcement , 1992 .

[23]  O. Williamson.  Calculativeness, Trust, and Economic Organization , 1993, The Journal of Law and Economics.

[24]  R. Barro,et al.  International Comparisons of Educational Attainment , 1993 .

[25]  A. Greif.  Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies , 1994, Journal of Political Economy.

[26]  T. Yamagishi,et al.  Trust and commitment in the United States and Japan , 1994 .

[27]  Herschel I. Grossman,et al.  Swords or Plowshares? A Theory of the Security of Claims to Property , 1995, Journal of Political Economy.

[28]  T. Bergstrom.  On the Evolution of Altruistic Ethical Rules for Siblings , 1995 .

[29]  R. Baumeister,et al.  The need to belong: desire for interpersonal attachments as a fundamental human motivation. , 1995, Psychological bulletin.

[30]  Joyce E. Berg,et al.  Trust, Reciprocity, and Social History , 1995 .

[31]  Stephen F. Knack,et al.  INSTITUTIONS AND ECONOMIC PERFORMANCE: CROSS‐COUNTRY TESTS USING ALTERNATIVE INSTITUTIONAL MEASURES , 1995 .

[32]  J. Helliwell,et al.  Economic Growth and Social Capital in Italy , 1995 .

[33]  Klaus Deininger,et al.  A New Data Set Measuring Income Inequality , 1996 .

[34]  J. Helliwell.  Economic Growth and Social Capital in Asia , 1996 .

[35]  Roberto Perotti.  Growth, income distribution, and democracy: What the data say , 1996 .

[36]  W. Galston.  Trust: The Social Virtues and the Creation of Prosperity , 1996 .

[37]  Melvyn G. Coles,et al.  Marriage and Class , 1997 .

[38]  I. Kawachi,et al.  Social capital, income inequality, and mortality. , 1997, American journal of public health.

[39]  George A. Akerlof.  Social Distance and Social Decisions , 1997 .

[40]  W. Easterly,et al.  Africa's Growth Tragedy: Policies and Ethnic Divisions , 1997 .

[41]  Stephen F. Knack,et al.  Does Social Capital Have an Economic Payoff? A Cross-Country Investigation , 1997 .

[42]  Stephen J. Rassenti,et al.  Reciprocity, Trust, and Payoff Privacy in Extensive Form Bargaining , 1998 .

[43]  W. Easterly.  The Middle Class Consensus and Economic Development , 1999 .

[44]  Stephen F. Knack.  Social capital, growth, and poverty : a survey of cross-country evidence , 1999 .

[45]  Edward,et al.  Measuring Trust , 2000 .