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Trust and the Distribution of Caution

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  • Breuer, Janice Boucher
  • McDermott, John

Abstract

Trust 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 Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18112.

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Date of creation: Aug 2009
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Handle: RePEc:pra:mprapa:18112

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Keywords: trust; trustworthiness; risk aversion; caution; output;

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References

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  1. Ernst Fehr, 2009. "On The Economics and Biology of Trust," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 235-266, 04-05.
  2. Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital And Predict Financial Decisions," Working Papers 909, Economic Growth Center, Yale University.
  3. Laura Schechter, 2005. "Traditional trust measurement and the risk confound: An experiment in rural paraguay," Artefactual Field Experiments 00106, The Field Experiments Website.
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  8. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
  9. Breuer, Janice Boucher & McDermott, John, 2009. "Trustworthiness and economic performance," MPRA Paper 16777, University Library of Munich, Germany.
  10. Glaeser, Edward Ludwig & Laibson, David I. & Scheinkman, Jose A. & Soutter, Christine L., 2000. "Measuring Trust," Scholarly Articles 4481497, Harvard University Department of Economics.
  11. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
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Cited by:
  1. Breuer, Janice Boucher & McDermott, John, 2012. "Culture, caution, and trust," Journal of Development Economics, Elsevier, vol. 97(1), pages 15-23.

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