Trust and the Distribution of Caution
AbstractTrust is often considered a determinant of economic performance. The exogeneity of trust, however, is questionable. We develop a model with heterogeneous agents to determine aggregate trustworthiness, trust, and output. People differ according to their risk aversion (caution). The distribution of risk aversion across individuals -- along with the threat of punishment -- is critical in the process by which trust is formed. The mean and variance of the distribution of caution have direct and indirect effects on trust. For the mean, the direct effect of caution is intuitive: societies with more cautious populations would have less trust. The indirect effect, however works through the perception of trustworthiness and leads to more trust. The net effect is, paradoxically, positive in homogenous societies. In heterogeneous societies, the reverse is true. Trust and output are endogenous, and not monotonically related across countries with different moments of the distribution of caution.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 18112.
Date of creation: Aug 2009
Date of revision:
trust; trustworthiness; risk aversion; caution; output;
Find related papers by JEL classification:
- Z1 - Other Special Topics - - Cultural Economics
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Social and Economic Stratification
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-31 (All new papers)
- NEP-CBE-2009-10-31 (Cognitive & Behavioural Economics)
- NEP-EVO-2009-10-31 (Evolutionary Economics)
- NEP-SOC-2009-10-31 (Social Norms & Social Capital)
- NEP-UPT-2009-10-31 (Utility Models & Prospect Theory)
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