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Can Integrity Replace Institutions? Theory and Evidence

Author

Listed:
  • Gilad Aharonovitz
  • Nathan Skuza
  • Faysal Fahs

    (School of Economic Sciences, Washington State University)

Abstract

Institutions are important for proper economic performance, but can be somewhat replaced by trust or other social norms. This study shows that institutions and trust can be replaced by integrity of the individual agents in the economy, regardless of any social arrangement. We construct a model of a transactions-based economy in which transactions are preceded by contracts, and show that any one of (1) institutions, (2) trust, or (3) integrity, can foster economic growth, while the absence of all three will lead to economic decay. The model also predicts that in the absence of institution and trust, dishonest agents may gain higher payoffs than honest agents. We construct data of economic performance of different social groups in Lebanon, measure integrity and other values of these groups, and support the latter conclusion with this data.

Suggested Citation

  • Gilad Aharonovitz & Nathan Skuza & Faysal Fahs, 2008. "Can Integrity Replace Institutions? Theory and Evidence," Working Papers 2009-06, School of Economic Sciences, Washington State University.
    • Handle: RePEc:wsu:wpaper:aharonovitz-3
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    File URL: http://faculty.ses.wsu.edu/WorkingPapers/Aharonovitz/WP2009-06_ASF-Integrity-Institutions.pdf
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E19 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Other
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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