trust

Doug Henwood dhenwood at panix.com
Mon Feb 15 18:13:59 PST 1999


[However they define trust....]

"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



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