Three essays on trust

Résumé

Since the early 18th-19th century trust was considered important for economic exchange and social cooperation. Adam Smith (1997 [1766]) observed notable differences across nations in the "probity" and "punctuality" of their populations. For example, "the Dutch are the most faithful to their word." John Stuart Mill also wrote about the importance of trust: "There are countries in Europe ... where the most serious impediment to conducting business concerns on a large scale, is the rarity of persons who are supposed fit to be trusted with the receipt and expenditure of large sums of money" (Mill, 1848, p. 132). Nowadays, in the knowledge economy invisible concepts as trust have been reinstated and deeply reconsidered within various social science fields - e.g., economics, political science, psychology and sociology. Trust is a multidimensional concept that characterizes formal and informal relationships between different groups of people such as friends, colleagues, community fellows, those from own or foreign ethnic group, race or nationality, or trust could be one-sidedly directed towards different kinds of institutions - private, public, national and supranational organizations. Several definitions would suffice for clarifying what trust is. Hinging on the concept of shared norms, Fukuyama (1995) defines trust as the expectation that arises when others in the community behave in honest, predictable and co-operative ways. Sarageldin and Dasgupta (2001) suggest that trust is "the expectation of one person about the action of others that affects the person's choice". For Williamson (1993) trust is based on a calculative response to the incentive structure confronting each person, where this incentive structure encompasses material, social and psychological rewards. Quite intuitive and simple is Hardin's (2004) and Kohn's (2008) view that sees trust as a relation between two parties A and B for the performance of a particular action or range of actions. Within that formulation, depending on the nature of A and B, we can distinguish between the two main types of trust - interpersonal and institutional. In neoclassical economic theory people invest in trust because they see it as a non-material resource necessary for building a reputation for honesty. Co-operative behavior and stable structures for transacting grow upon trust and the good reputation based on it. In neo-institutional theory, transacting is itself a process of trust-building that makes possible the emergence of networks of co-operating agents. In the constructivist perspective, trust is the key ingredient for social cooperation and leadership is successful if it manages to engineer trust among group members. In several well-known theories trust has been examined inseparably from social capital. Putnam (1993) defines social capital as those "features of social life, networks, norms and trust that enable participants to act together more effectively to pursue shared objectives". Trust is a fundamental building block of social capital (Putnam, 1993) and it is an outcome of networks and norms, which both serve as a prerequisite for building trust (Roth, 2007). Fukuyama further explains the integration of social capital and trust. He defines social capital as "an instantiated informal norm that promotes co-operation between two or more individuals" (Fukuyama, 2000). We can see that such an idea of social capital is quite related to Hardin's (2004) definition of trust. In economics, a very recent branch of the literature develops theories and tests empirically whether trust, either as a component of social capital or a variable on its own, could be related with market functioning and economic growth. As Arrow (1972) observed: "Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence." Guiso et al. (2008), for example, build a model in which they explain the long-term persistence of positive historical experiences of cooperation (Putnam, 1993). They show that intergenerational transmission of trustworthiness tends to be biased towards conservative initial conditions. As a consequence, societies could be stifled in a low-trust equilibrium. The empirical economics literature goes further than the theories by providing evidence which amongst others correlates trust to the performance of financial markets (Guiso et al. 2004), large organizations (La Porta el al., 1997) and business networks (Ees and Bachmann, 2006). Trust on its own, as a proxy for culture, favors economic development according to the cross-country study Tabellini (2010). Through its influence on investment and transaction costs, trust has been correlated to economic growth (Zak and Knack, 2001). In quantitative terms, Knack and Keefer (1997), for example, show that an increase in one standard deviation in interpersonal trust at the country-level predicts an increase in economic growth of more than one-half of a standard deviation. The study of Algan and Cahuc (2010) identifies a sizeable causal effect of inherited trust of descendants of US immigrants on worldwide growth during 20th century. Similar conclusions could be drawn about regional growth from the study of Oguzhan and Uslaner (2010) which finds that high trust US regions achieve faster economic growth. However, there are studies that question the relationship between trust and growth when it comes to different groups of countries. For example, Raiser (1999) argues that trust relates to economic growth only in developed market economies where financial markets are developed, but not the case of the Central European countries. On the contrary, Roth (2007), analyzing 41 countries from 1980-2004 found a negative relationship between trust and growth driven by developed countries, while for the developing countries trust has a positive impact on growth. It could be that trust associates to growth in countries where property and contractual rights are not protected enough but it is also possible that too much trust harms economic growth. Social science research in general has suggested diverse effects of trust on socio-economic outcomes such as crime (Glaeser, Sacerdote and Scheinkman, 1995), the power of the family (Alesina and Giuliano, 2007), innovation (Fountain, 1997), the spread of secondary education (Goldin and Katz, 2001), judicial efficiency (La Porta et al., 1997) and institutions¿ design and performance (Djankov et al. 2003). Bearing in mind the favorable impact of trust on society, researchers have been also investigating the possible factors that could create trust. This perspective is in line with constructivist theory which suggests that leaders could engineer trust by using certain policies or by improving institutions' performance. The reverse view claims that trust is based on deeply rooted cultural traditions (Fukuyama, 1995; Putnam et al., 1993) and its persistence would not be liable to institution or policy generated change construed in less than a generation. Within the constructivist theory, trust determinants that could be affected through policy tools, institutions or citizens' initiative include socio-economic heterogeneity, legal institutions, media and civil society. For example, Knack and Zak (2001) and Alesina and La Ferrara (2002) find that interpersonal trust is higher in societies that are fairer, ethnically, socially and economically more homogeneous. Trust is also nurtured in democratic societies characterized by civil liberties and security of property rights (Alesina and La Ferrara 2000-2002). The media is another channel that could affect people's opinions and perceptions of others. Guiso et al. (2008) uncovers the negative relationship between press coverage about other countries and trust towards people from other countries, which could be explained by the predominantly negative news coverage by newspapers and the bad stereotypes thus bred. Reduction of crime and corruption, the development of a vital civil society, policies promoting equality of opportunities, the development of legal institutions and freedoms are all possible mechanisms through which trust variation might be instigated. This Thesis consists of three empirical articles in support of the constructivist theory claim that policy makers¿ actions or politico-economic shocks might bring variation in trust to be observed within a generation. The first article explores whether terrorist attacks might influence aggregate level or social trust. The particular study case is based on the 9/11 attacks in the US and is justified by two social psychology theories. According to functional theory, a conflict with an external enemy could nurture social trust by bringing cohesion within a society. The contrary view is that external conflict does not necessary related to internal attitudes. In addition, we could think of a negative impact of the attacks on social trust involving panic and fear. The second article uses US individual data to study whether intergenerational income mobility could affect interpersonal trust. The hypothesis is that upward income mobility could be correlated to unobservable stronger perceptions of fairness of the system and experience of equality of opportunity, and therefore would increase interpersonal trust. The reverse holds for downward income mobility - it could destroy trust in others through its relationship with unobservable perceptions of high risk, uncertainty or lack of fairness. The third article studies the impact of EU Enlargement in 2004 on interpersonal and institutional trust in Eastern Europe. The hypothesis is that trust might be positively affected by the Enlargement as individuals would grasp some tangible benefits such as freedom of movement, student exchange and job opportunities as well as by changed expectations of improved standard of living.