"Trust and Growth"
BY: PAUL J. ZAK
Claremont Graduate University
STEPHEN KNACK
American University
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=136961
Date: September 18, 1998
Contact: PAUL J. ZAK
Email: Mailto:paul.zak at cgu.edu
Postal: Claremont Graduate University
Claremont, CA 91711-6165 USA
Phone: (909)621-8788
Co-Auth: STEPHEN KNACK
Email: Mailto:knack at american.edu
Postal: American University
4400 Massachusetts Avenue, NW
Washington, DC 20016 USA
ABSTRACT:
Why does trust vary so substantially across countries? How does
trust affect growth? This paper presents a general equilibrium
growth model in which heterogeneous agents transact and face a
moral hazard problem. Agents in this world 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 characterize the social, economic and
institutional environments in which trust will be high and show
that low trust environments reduce the rate of investment and
thus the economy's growth rate. Further, we show that very low
trust societies can be caught in a poverty trap. The predictions
of the model are examined empirically for a cross-section of
countries and have substantial support in the data. Trust is
higher in more ethnically, socially and economically homogeneous
societies and where legal and social mechanisms for constraining
opportunism are better developed. High-trust societies, in turn,
exhibit higher rates of investment and growth.
JEL Classification: D9, D82, D31