IDEAS home Printed from https://ideas.repec.org/p/diw/diwsop/diw_sp154.html
   My bibliography  Save this paper

On the Economics and Biology of Trust

Author

Listed:
  • Ernst Fehr

Abstract

In recent years, many social scientists have claimed that trust plays an important role in economic and social transactions. Despite its proposed importance, the measurement and the definition of trust seem to be not fully settled, and the identification of the exact role of trust in economic interactions has proven to be elusive. It is still not clear whether trust is just an epiphenomenon of good institutions or whether it plays an independent causal role capable of shaping important aggregate economic outcomes. In this paper, I rely on a behavioral definition of trust that enables us to relate it to economic primitives such as preferences and beliefs. I review strong biological and behavioral evidence indicating that trusting is not just a special case of risk-taking, but based on important forms of social preferences such as betrayal aversion. Behaviorally defined trust also opens the door for understanding national and ethnic trust differences in terms of differences in preferences and beliefs, and it suggests ways to examine and interpret a causal role of trust.

Suggested Citation

  • Ernst Fehr, 2008. "On the Economics and Biology of Trust," SOEPpapers on Multidisciplinary Panel Data Research 154, DIW Berlin, The German Socio-Economic Panel (SOEP).
  • Handle: RePEc:diw:diwsop:diw_sp154
    as

    Download full text from publisher

    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.93249.de/diw_sp0154.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dirk Engelmann & Martin Strobel, 2004. "Inequality Aversion, Efficiency, and Maximin Preferences in Simple Distribution Experiments," American Economic Review, American Economic Association, vol. 94(4), pages 857-869, September.
    2. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences with Simple Tests," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 817-869.
    3. Naef, Michael & Schupp, Jürgen, 2009. "Measuring Trust: Experiments and Surveys in Contrast and Combination," IZA Discussion Papers 4087, Institute of Labor Economics (IZA).
    4. Gary Charness & Guillaume R. Frechette & John H. Kagel, 2004. "How Robust is Laboratory Gift Exchange?," Experimental Economics, Springer;Economic Science Association, vol. 7(2), pages 189-205, June.
    5. Gary Charness, 2004. "Attribution and Reciprocity in an Experimental Labor Market," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 665-688, July.
    6. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
    7. Zak, Paul J & Knack, Stephen, 2001. "Trust and Growth," Economic Journal, Royal Economic Society, vol. 111(470), pages 295-321, April.
    8. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 817-868.
    9. Ernst Fehr & Michael Naef & Klaus M. Schmidt, 2006. "Inequality Aversion, Efficiency, and Maximin Preferences in Simple Distribution Experiments: Comment," American Economic Review, American Economic Association, vol. 96(5), pages 1912-1917, December.
    10. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 437-459.
    11. Camerer, Colin & Weigelt, Keith, 1988. "Experimental Tests of a Sequential Equilibrium Reputation Model," Econometrica, Econometric Society, vol. 56(1), pages 1-36, January.
    12. 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.
    13. Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital and Predict Financial Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1688-1699, December.
    14. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February.
    15. 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.
    16. Lorenz Goette & David Huffman & Stephan Meier, 2006. "The Impact of Group Membership on Cooperation and Norm Enforcement: Evidence Using Random Assignment to Real Social Groups," American Economic Review, American Economic Association, vol. 96(2), pages 212-216, May.
    17. Martin Brown & Armin Falk & Ernst Fehr, 2004. "Relational Contracts and the Nature of Market Interactions," Econometrica, Econometric Society, vol. 72(3), pages 747-780, May.
    18. Houser, Daniel & Schunk, Daniel & Winter, Joachim, 2010. "Distinguishing trust from risk: An anatomy of the investment game," Journal of Economic Behavior & Organization, Elsevier, vol. 74(1-2), pages 72-81, May.
    19. Hong, Kessely & Bohnet, Iris, 2007. "Status and distrust: The relevance of inequality and betrayal aversion," Journal of Economic Psychology, Elsevier, vol. 28(2), pages 197-213, April.
    20. Iris Bohnet & Steffen Huck, 2004. "Repetition and Reputation: Implications for Trust and Trustworthiness When Institutions Change," American Economic Review, American Economic Association, vol. 94(2), pages 362-366, May.
    21. Charles Bellemare & Sabine Kroger & Arthur van Soest, 2007. "Preferences, Intentions, and Expectations: a Large-Scale Experiment with a Representative Subject Pool," Cahiers de recherche 0721, CIRPEE.
    22. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2009. "Cultural Biases in Economic Exchange?," The Quarterly Journal of Economics, Oxford University Press, vol. 124(3), pages 1095-1131.
    23. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May.
    24. Cox, James C., 2004. "How to identify trust and reciprocity," Games and Economic Behavior, Elsevier, vol. 46(2), pages 260-281, February.
    25. Reuben, Ernesto & Sapienza, Paola & Zingales, Luigi, 2009. "Is mistrust self-fulfilling?," Economics Letters, Elsevier, vol. 104(2), pages 89-91, August.
    26. Huck, Steffen & Lünser, Gabriele K. & Tyran, Jean-Robert, 2012. "Competition fosters trust," Games and Economic Behavior, Elsevier, vol. 76(1), pages 195-209.
    27. Bohnet, Iris & Frey, Bruno S. & Huck, Steffen, 2001. "More Order with Less Law: On Contract Enforcement, Trust, and Crowding," American Political Science Review, Cambridge University Press, vol. 95(1), pages 131-144, March.
    28. Bohnet, Iris & Zeckhauser, Richard, 2004. "Trust, risk and betrayal," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 467-484, December.
    29. Michael Kosfeld & Markus Heinrichs & Paul J. Zak & Urs Fischbacher & Ernst Fehr, 2005. "Oxytocin increases trust in humans," Nature, Nature, vol. 435(7042), pages 673-676, June.
    30. Ernst Fehr & John A. List, 2004. "The Hidden Costs and Returns of Incentives-Trust and Trustworthiness Among CEOs," Journal of the European Economic Association, MIT Press, vol. 2(5), pages 743-771, September.
    31. repec:pri:rpdevs:gamespaper.pdf is not listed on IDEAS
    32. Jordi Brandts & Gary Charness, 2004. "Do Labour Market Conditions Affect Gift Exchange? Some Experimental Evidence," Economic Journal, Royal Economic Society, vol. 114(497), pages 684-708, July.
    33. Laura Schechter, 2006. "Trust, trustworthiness, and risk in rural Paraguay," Experimental Economics, Springer;Economic Science Association, vol. 9(2), pages 173-173, June.
    34. repec:hrv:faseco:30726298 is not listed on IDEAS
    35. Helen Bernhard & Urs Fischbacher & Ernst Fehr, 2006. "Parochial altruism in humans," Nature, Nature, vol. 442(7105), pages 912-915, August.
    36. Michael Kosfeld & Armin Falk, 2006. "The Hidden Costs of Control," American Economic Review, American Economic Association, vol. 96(5), pages 1611-1630, December.
    37. Eckel, Catherine C. & Wilson, Rick K., 2004. "Is trust a risky decision?," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 447-465, December.
    38. Iris Bohnet & Fiona Greig & Benedikt Herrmann & Richard Zeckhauser, 2008. "Betrayal Aversion: Evidence from Brazil, China, Oman, Switzerland, Turkey, and the United States," American Economic Review, American Economic Association, vol. 98(1), pages 294-310, March.
    39. Iris Bohnet & Yael Baytelman, 2007. "Institutions and Trust," Rationality and Society, , vol. 19(1), pages 99-135, February.
    40. Gary E. Bolton & Axel Ockenfels, 2006. "Inequality Aversion, Efficiency, and Maximin Preferences in Simple Distribution Experiments: Comment," American Economic Review, American Economic Association, vol. 96(5), pages 1906-1911, December.
    41. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Goeschl, Timo & Jarke, Johannes, 2014. "Trust, but verify? When trustworthiness is observable only through (costly) monitoring," WiSo-HH Working Paper Series 20, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.
    2. James Andreoni, 2018. "Satisfaction Guaranteed: When Moral Hazard Meets Moral Preferences," American Economic Journal: Microeconomics, American Economic Association, vol. 10(4), pages 159-189, November.
    3. Martin G. Kocher, 2015. "How Trust in Social Dilemmas Evolves with Age," CESifo Working Paper Series 5447, CESifo.
    4. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    5. Houser, Daniel & Schunk, Daniel & Winter, Joachim, 2010. "Distinguishing trust from risk: An anatomy of the investment game," Journal of Economic Behavior & Organization, Elsevier, vol. 74(1-2), pages 72-81, May.
    6. Sutter, Matthias & Kocher, Martin G., 2007. "Trust and trustworthiness across different age groups," Games and Economic Behavior, Elsevier, vol. 59(2), pages 364-382, May.
    7. Rahul Mehrotra & Vincent Somville & Lore vandewalle, 2016. "Increasing trust in the bank to enhance savings: Experimental evidence from India," CMI Working Papers 2, CMI (Chr. Michelsen Institute), Bergen, Norway.
    8. Ashraf, Nava & Bohnet, Iris & Piankov, Nikita, 2003. "Is Trust a Bad Investment?," Working Paper Series rwp03-047, Harvard University, John F. Kennedy School of Government.
    9. Rodriguez-lara, Ismael, 2015. "Equal distribution or equal payoffs? Reciprocity and inequality aversion in the investment game," MPRA Paper 63313, University Library of Munich, Germany.
    10. Sandra Maximiano & Randolph Sloof & Joep Sonnemans, 2007. "Gift Exchange in a Multi-Worker Firm," Economic Journal, Royal Economic Society, vol. 117(522), pages 1025-1050, July.
    11. Giuseppe Albanese & Guido de Blasio & Paolo Sestito, 2017. "Trust, risk and time preferences: evidence from survey data," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 64(4), pages 367-388, December.
    12. Kim, Jeongbin & Putterman, Louis & Zhang, Xinyi, 2022. "Trust, Beliefs and Cooperation: Excavating a Foundation of Strong Economies," European Economic Review, Elsevier, vol. 147(C).
    13. Ismael Rodriguez-Lara, 2018. "No evidence of inequality aversion in the investment game," PLOS ONE, Public Library of Science, vol. 13(10), pages 1-16, October.
    14. John A. List, 2006. "The Behavioralist Meets the Market: Measuring Social Preferences and Reputation Effects in Actual Transactions," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 1-37, February.
    15. Polipciuc, Maria, 2022. "Group identity and betrayal: decomposing trust," ROA Research Memorandum 002, Maastricht University, Research Centre for Education and the Labour Market (ROA).
    16. Ernst Fehr & Alexander Klein & Klaus M Schmidt, 2007. "Fairness and Contract Design," Econometrica, Econometric Society, vol. 75(1), pages 121-154, January.
    17. Schwerter, Frederik & Zimmermann, Florian, 2020. "Determinants of trust: The role of personal experiences," Games and Economic Behavior, Elsevier, vol. 122(C), pages 413-425.
    18. Hong, Kessely & Bohnet, Iris, 2007. "Status and distrust: The relevance of inequality and betrayal aversion," Journal of Economic Psychology, Elsevier, vol. 28(2), pages 197-213, April.
    19. Bejarano, Hernán & Gillet, Joris & Rodriguez-Lara, Ismael, 2021. "Trust and trustworthiness after negative random shocks," Journal of Economic Psychology, Elsevier, vol. 86(C).
    20. Calabuig, Vicente & Fatas, Enrique & Olcina, Gonzalo & Rodriguez-Lara, Ismael, 2016. "Carry a big stick, or no stick at all," Journal of Economic Psychology, Elsevier, vol. 57(C), pages 153-171.

    More about this item

    Keywords

    trust; preferences; beliefs; biological basis;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D0 - Microeconomics - - General
    • D2 - Microeconomics - - Production and Organizations
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. SOEP based publications

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diwsop:diw_sp154. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/sodiwde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek (email available below). General contact details of provider: https://edirc.repec.org/data/sodiwde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.