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Social Trust and Economic Governance

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  • Huang Fali

    ()
    (School of Economics and Social Sciences, Singapore Management University)

Abstract

The paper investigates the dynamic relationship between social trust and economic governance using a principal-agent model with stochastic returns. To mitigate the inherent moral hazard problem both intrinsic and extrinsic incentives are useful. The cooperative tendency of an agent measures his intrinsic discipline against shirking, the distribution of which characterizes social trust in society. The economic governance methods include direct monitoring and efficiency wage. The main results are the following. An agent with a higher cooperative tendency needs less monitoring and a lower wage to make effort, which brings higher profit for the principal. But competition among principals for more cooperative agents drains away the extra profit and passes it on to the agent as a sign-in bonus. So an agent with a higher cooperative tendency ends up earning a higher total income. In the short run when cooperative tendencies are fixed, the distribution of economic governance intensity in the economy is detrmined by social trust. In the long run when cooperative tendencies are endogenously formed to maximize an agent’s lifetime utility, both social trust and economic governance are determined by fundamentals such as the costs of monitoring, screening, and investing in cooperative tendency. In the steady state, social trust increases in monitoring cost and decreases in screening and investing costs. An important insight the paper delivers is that principals always benefit from a lower monitoring cost but not necessarily from a higher social trust. Both downward and upward movement of social trust and economic governance, once started, would continue monotonically. Their relative strength across societies is preserved or reinforced over time.

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File URL: https://mercury.smu.edu.sg/rsrchpubupload/1919/trustgovernancenew.pdf
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Bibliographic Info

Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 14-2004.

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Length: 35 pages
Date of creation: Apr 2004
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:14-2004

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  1. James J. Heckman, 1999. "Policies to Foster Human Capital," NBER Working Papers 7288, National Bureau of Economic Research, Inc.
  2. Daniel Nagin & James Rebitzer & Seth Sanders & Lowell Taylor, 2002. "Monitoring, Motivation and Management: The Determinants of Opportunistic Behavior in a Field Experiment," NBER Working Papers 8811, National Bureau of Economic Research, Inc.
  3. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
  4. Avinash Dixit, 2001. "On Modes of Economic Governance," CESifo Working Paper Series 589, CESifo Group Munich.
  5. Rafael Rob & Peter Zemsky, . "Social Capital, Corporate Culture and Incentive Intensity," Penn CARESS Working Papers 7380c2f90d0b2f362ad71f139, Penn Economics Department.
  6. Rongzhu Ke & Weiying Zhang, 2003. "Trust in China: A Cross-Regional Analysis," William Davidson Institute Working Papers Series 2003-586, William Davidson Institute at the University of Michigan.
  7. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  8. Steven Shavell, 2002. "Law versus Morality as Regulators of Conduct," American Law and Economics Review, Oxford University Press, vol. 4(2), pages 227-257.
  9. Greif, Avner, 1994. "Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 912-50, October.
  10. Ellison, Glenn, 1994. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 567-88, July.
  11. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
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