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The Right Amount of Trust

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Author Info

  • Jeffrey Butler

    (Einaudi Institute for Economics and Finance, EIEF)

  • Paola Giuliano

    (UCLA, NBER, CEPR and IZA)

  • Luigi Guiso

    (European University Institute, EIEF and CEPR)

Abstract

We investigate the relationship between individual trust and individual economic performance. We find that individual income is hump-shaped in a measure of intensity of trust beliefs. Heterogeneity of trust beliefs in the population, coupled with the tendency of individuals to extrapolate beliefs about others from their own levels of trustworthiness, could generate this non-monotonic relationship: highly trustworthy individuals tend to form overly optimistic beliefs, to assume too much social risk and to be cheated more often, ultimately performing less well than those with a belief close to the mean trustworthiness of the population. On the other hand, less trustworthy individuals form overly pessimistic beliefs and avoid being cheated, but give up profitable opportunities, therefore underperforming. The cost of either too much or too little trust is comparable to the income lost by foregoing college. Our findings in large-scale survey data are supported and extended with experimental findings. We show that in the trust game, own trustworthiness and beliefs about others’ trustworthiness are strongly correlated and persistent and that patterns in earnings lost due to incorrect beliefs are comparable to those in the survey data.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.61.

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Date of creation: May 2010
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Handle: RePEc:fem:femwpa:2010.61

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Keywords: Trust; Trustworthiness; Economic Performance; Culture; False Consensus;

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References

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  1. Aghion, Philippe & Algan, Yann & Cahuc, Pierre & Shleifer, Andrei, 2010. "Regulation and Distrust," Scholarly Articles 12490649, Harvard University Department of Economics.
  2. Alessandra Fogli & Raquel Fernandez, 2005. "Culture: An Empirical Investigation of Beliefs, Work, and Fertility," Working Papers 05-07, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2000. "The Role of Social Capital in Financial Development," CRSP working papers 511, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. Huck, Steffen & Weizsacker, Georg, 2002. "Do players correctly estimate what others do? : Evidence of conservatism in beliefs," Journal of Economic Behavior & Organization, Elsevier, vol. 47(1), pages 71-85, January.
  5. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2006. "Does Culture Affect Economic Outcomes?," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 23-48, Spring.
  6. Nava Ashraf & Iris Bohnet & Nikita Piankov, 2006. "Decomposing trust and trustworthiness," Experimental Economics, Springer, vol. 9(3), pages 193-208, September.
  7. Alberto Bisin & Thierry Verdier, 2000. ""Beyond The Melting Pot": Cultural Transmission, Marriage, And The Evolution Of Ethnic And Religious Traits," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 955-988, August.
  8. Paola Giuliano, 2005. "Living Arrangements in Western Europe: Does Cultural Origin Matter?," 2005 Meeting Papers 189, Society for Economic Dynamics.
  9. Cox, James C., 2004. "How to identify trust and reciprocity," Games and Economic Behavior, Elsevier, vol. 46(2), pages 260-281, February.
  10. Zak, Paul J & Knack, Stephen, 2001. "Trust and Growth," Economic Journal, Royal Economic Society, vol. 111(470), pages 295-321, April.
  11. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2009. "Cultural Biases in Economic Exchange?," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 1095-1131, August.
  12. Bohnet, Iris & Croson, Rachel, 2004. "Trust and trustworthiness," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 443-445, December.
  13. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
  14. Glaeser, Edward Ludwig & Laibson, David I. & Scheinkman, Jose A. & Soutter, Christine L., 2000. "Measuring Trust," Scholarly Articles 4481497, Harvard University Department of Economics.
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  1. The Trust Bias! Whats The Right Level of Trust?
    by Miguel in Simoleon Sense on 2010-03-23 22:24:28
  2. We need public data on general trustworthiness
    by Economic Logician in Economic Logic on 2009-12-03 15:12:00
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