Building trust: public policy, interpersonal trust and economic development
Zak & Knack (2001) demonstrate that interpersonal trust substantially impacts economic growth, and that sufficient interpersonal trust is necessary for economic development. To investigate the ability of policy-makers to affect trust levels, this paper builds a formal model characterizing public policies that can raise trust. The model is used to derive optimal funding for trust-raising policies when policy-makers seek to stimulate economic growth. Policies examined include those that increase freedom of association, build civic cultures, enhance contract enforcement, reduce income inequality, and raise educational levels. Testing the model's predictions, we find that only freedom, redistributive transfers, and education efficiently and robustly stimulate prosperity. They do this by strengthening the rule of law, reducing inequality, and by facilitating interpersonal understanding, all of which raise trust.
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- Vernon L. Smith, 1998. "The Two Faces of Adam Smith," Southern Economic Journal, Southern Economic Association, vol. 65(1), pages 2-19, July.
- Knack, Stephen, 2000. "Social capital and the quality of Government : evidence from the U.S. States," Policy Research Working Paper Series 2504, The World Bank.
- Ghate, Chetan & Zak, Paul J., 2002.
"Growth of government and the politics of fiscal policy,"
Structural Change and Economic Dynamics,
Elsevier, vol. 13(4), pages 435-455, December.
- Chetan Ghate & Paul J. Zak, . "Growth of Government And The Politics of Fiscal Policy," Claremont Colleges Working Papers 2000-19, Claremont Colleges.
- Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
- Zak, Paul J & Knack, Stephen, 2001. "Trust and Growth," Economic Journal, Royal Economic Society, vol. 111(470), pages 295-321, April.
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