We build a simple model of trust as an equilibrium phenomenon, departing from standard "selfish" preferences in a minimal way. Agents who are on the receiving end of an other to transact can choose whether to cheat and take away the entire surplus, taking into account a "cost of cheating." The latter has an idiosyncratic component (an agent's type), and a socially determined one. The smaller the mass of agents who cheat, the larger the cost of cheating suffered by those who cheat. Depending on the parameter values, the model can have a unique equilibrium level of trust (the proportion of transactions not cheated on), or two equilibria, one with high and the other with low trust. Thus, differences in trust levels across societies can reflect different fundamentals or, for the same fundamentals, a switch across multiple equilibria. Surprisingly, we find that these two possibilities are partially identifiable from an empirical point of view. Our model can also be reinterpreted as one with standard selfish preferences and an enforcement agency with limited resources that are used to catch and fine a subset of those who cheat. Lastly, we carry out a robustness exercise in which agents learn in a simple way from experience about how many agents cheat in society. Our results indicate that when there are multiple equilibria the high trust equilibrium is less robust than the low trust one.
|Date of creation:||2009|
|Date of revision:||Dec 2009|
|Contact details of provider:|| Postal: Via Sallustiana, 62 - 00187 Roma|
Phone: +39 066790013
Fax: +39 0647924872
Web page: http://www.eief.it/repec
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Guido Tabellini, 2008.
"The Scope of Cooperation: Values and Incentives,"
CESifo Working Paper Series
2236, CESifo Group Munich.
- Guido Tabellini, 2007. "The Scope of Cooperation: values and incentives," Working Papers 328, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Tabellini, Guido, 2007. "The Scope of Cooperation: Values and incentives," CEPR Discussion Papers 6534, C.E.P.R. Discussion Papers.
- 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.
- Edward L. Glaeser & David I. Laibson & José A. Scheinkman & Christine L. Soutter, 2000.
The Quarterly Journal of Economics,
Oxford University Press, vol. 115(3), pages 811-846.
- Blume, Lawrence, 2002.
"Stigma and Social Control,"
119, Institute for Advanced Studies.
- Jeffrey Butler & Paola Giuliano & Luigi Guiso, 2009.
"The Right Amount of Trust,"
NBER Working Papers
15344, National Bureau of Economic Research, Inc.
- Butler, Jeffrey V. & Giuliano, Paola & Guiso, Luigi, 2009. "The Right Amount of Trust," IZA Discussion Papers 4416, Institute for the Study of Labor (IZA).
- Jeffrey Butler & Paola Giuliano & Luigi Guiso, 2009. "The Right Amount of Trust," Economics Working Papers ECO2009/33, European University Institute.
- Jeffrey Butler & Paola Giuliano & Luigi Guiso, 2010. "The Right Amount of Trust," Working Papers 2010.61, Fondazione Eni Enrico Mattei.
- Butler, Jeff & Giuliano, Paola & Guiso, Luigi, 2009. "The Right Amount of Trust," CEPR Discussion Papers 7461, C.E.P.R. Discussion Papers.
- Jeffrey Butler & Paola Giuliano & Luigi Guiso, 2009. "The Right Amount of Trust," EIEF Working Papers Series 0908, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2009.
- Kim Jong-Il & Lau Lawrence J., 1994. "The Sources of Economic Growth of the East Asian Newly Industrialized Countries," Journal of the Japanese and International Economies, Elsevier, vol. 8(3), pages 235-271, September.
- Joel Sobel, 2002. "Can We Trust Social Capital?," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 139-154, March.
- Horst, Ulrich & Scheinkman, Jose A., 2006.
"Equilibria in systems of social interactions,"
Journal of Economic Theory,
Elsevier, vol. 130(1), pages 44-77, September.
- J. Scheinkman & U. Horst, 2003. "Equilibria in Systems of Social Interactions," Princeton Economic Theory Working Papers d5a39039d26e0b08775b915bf, David K. Levine.
- U. Horst & Jose A. Scheinkman, 2010. "Equilibria in Systems of Social Interactions," Levine's Working Paper Archive 506439000000000119, David K. Levine.
- Avinash Dixit, 2003. "Trade Expansion and Contract Enforcement," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1293-1317, December.
- Young, Alwyn, 1994. "Lessons from the East Asian NICS: A contrarian view," European Economic Review, Elsevier, vol. 38(3-4), pages 964-973, April.
- Bernd Irlenbusch, 2006. "Are non-binding contracts really not worth the paper?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 21-40.
- Phillips, P.C.B., 1989.
"Partially Identified Econometric Models,"
Cambridge University Press, vol. 5(02), pages 181-240, August.
- Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996.
"Trust in Large Organizations,"
NBER Working Papers
5864, National Bureau of Economic Research, Inc.
- Vernon L. Smith, 1998. "The Two Faces of Adam Smith," Southern Economic Journal, Southern Economic Association, vol. 65(1), pages 2-19, July.
When requesting a correction, please mention this item's handle: RePEc:eie:wpaper:0913. 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: (Facundo Piguillem)
If references are entirely missing, you can add them using this form.