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Trust and Trade

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  • Oskar Nupia

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Abstract

This paper presents a model demonstrating how trust affects the volume of trade in a society. There are two ways in which this happens. First, at minimum, societies need a certain level of trust in order to observe trading activity. Second, once this minimum condition is satisfied, the probability of observing a larger volume of trade is high only if the level of trust is sufficiently high. Our results help explain empirical findings that demonstrate a positive relationship between trust and the volume of sales, or the value added of trade. The model also shows that institutions can compensate for low levels of trust-that is, societies with low levels of trust can achieve volumes of trade comparable to those of societies with high levels of trust by spending more resources on increasing the quality of the relevant institutions.

Suggested Citation

  • Oskar Nupia, 2009. "Trust and Trade," DOCUMENTOS CEDE 005345, UNIVERSIDAD DE LOS ANDES-CEDE.
  • Handle: RePEc:col:000089:005345
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    File URL: http://economia.uniandes.edu.co/publicaciones/dcede2009-03.pdf
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    References listed on IDEAS

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    1. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "The Role of Social Capital in Financial Development," American Economic Review, American Economic Association, vol. 94(3), pages 526-556, June.
    2. Marcel Fafchamps & Bart Minten, 2001. "Social Capital and Agricultural Trade," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 680-685.
    3. La Porta, Rafael, et al, 1997. "Trust in Large Organizations," American Economic Review, American Economic Association, vol. 87(2), pages 333-338, May.
    4. Stephen Knack & Philip Keefer, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1251-1288.
    5. Joel Sobel, 2002. "Can We Trust Social Capital?," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 139-154, March.
    6. repec:hrv:faseco:30726298 is not listed on IDEAS
    7. Mark Granovetter, 2005. "The Impact of Social Structure on Economic Outcomes," Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 33-50, Winter.
    8. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    9. Somanathan, E. & Rubin, Paul H., 2004. "The evolution of honesty," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 1-17, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    trust; volume of trade; social capital; contract enforcement;

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • D00 - Microeconomics - - General - - - General
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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