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Trust and Vulnerability

  • Christopher Bidner

    ()

    (School of Economics, The University of New South Wales)

  • Ken Jackson

    ()

    (Department of Economics, Wilfried Laurier University)

By facilitating mutually beneficial transactions, trust is a crucial ingredient for economic development. We explore the determinants of trust by studying a model in which agents rely on imperfectly enforceable contracts to support cooperation in a prisoners’ dilemma production game. We show how a fundamental relationship between vulnerability and trust emerges when players observe private signals of the strength of contract enforceability, even in the limit as signal noise vanishes. In uncovering this relationship, the model demonstrates the importance of social institutions in the development process. We show stronger social institutions, by reducing vulnerability, increase equilibrium trust, promote the use of superior technologies, and interact with formal legal institutions.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-09.pdf
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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-09.

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Length: 22 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:swe:wpaper:2012-09
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  1. Schechter, Laura, 2007. "Traditional trust measurement and the risk confound: An experiment in rural Paraguay," Journal of Economic Behavior & Organization, Elsevier, vol. 62(2), pages 272-292, February.
  2. Carlsson, H. & van Damme, E.E.C., 1990. "Global games and equilibrium selection," Discussion Paper 1990-52, Tilburg University, Center for Economic Research.
  3. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, vol. 97(3), pages 916-943, June.
  4. Nunn, Nathan, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," Scholarly Articles 4686801, Harvard University Department of Economics.
  5. Gustavsson, Magnus & Jordahl, Henrik, 2006. "Inequality and Trust in Sweden: Some Inequalities are More Harmful than Others," Ratio Working Papers 106, The Ratio Institute.
  6. 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.
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  10. Bond, Philip & Rai, Ashok S., 2009. "Borrower runs," Journal of Development Economics, Elsevier, vol. 88(2), pages 185-191, March.
  11. Breuer, Janice Boucher & McDermott, John, 2012. "Culture, caution, and trust," Journal of Development Economics, Elsevier, vol. 97(1), pages 15-23.
  12. Dora L. Costa & Matthew E. Kahn, 2003. "Cowards And Heroes: Group Loyalty In The American Civil War," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 519-548, May.
  13. Sylvain Chassang, 2010. "Fear of Miscoordination and the Robustness of Cooperation in Dynamic Global Games With Exit," Econometrica, Econometric Society, vol. 78(3), pages 973-1006, 05.
  14. Ken Jackson, 2013. "Contract Enforceability and the Evolution of Social Capital," Journal of Law, Economics and Organization, Oxford University Press, vol. 29(1), pages 60-77, February.
  15. Bidner, Chris & Francois, Patrick, 2009. "Cultivating Trust: Norms, Institutions and the Implications of Scale," Economics working papers patrick_francois-2009-66, Vancouver School of Economics, revised 02 Dec 2009.
  16. Zak, Paul J & Knack, Stephen, 2001. "Trust and Growth," Economic Journal, Royal Economic Society, vol. 111(470), pages 295-321, April.
  17. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  18. Francois, P. & Zabojnik, J., 2003. "Trust, Social Capital and Economic Development," Discussion Paper 2003-116, Tilburg University, Center for Economic Research.
  19. Alesina, Alberto & La Ferrara, Eliana, 2002. "Who trusts others?," Journal of Public Economics, Elsevier, vol. 85(2), pages 207-234, August.
  20. Chassang, Sylvain & Miquel, Gerard Padró i, 2009. "Economic Shocks and Civil War," Quarterly Journal of Political Science, now publishers, vol. 4(3), pages 211-228, October.
  21. Avinash Dixit, 2003. "Trade Expansion and Contract Enforcement," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1293-1317, December.
  22. Christian Bjørnskov, 2007. "Determinants of generalized trust: A cross-country comparison," Public Choice, Springer, vol. 130(1), pages 1-21, January.
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