Trust and Trade

Oskar Nupia

No 5345, Documentos CEDE from Universidad de los Andes, Facultad de Economía, CEDE

Abstract: This paper presents a model demonstrating how trust affects the volume of trade in a society. There are two ways in which this happens. First, at minimum, societies need a certain level of trust in order to observe trading activity. Second, once this minimum condition is satisfied, the probability of observing a larger volume of trade is high only if the level of trust is sufficiently high. Our results help explain empirical findings that demonstrate a positive relationship between trust and the volume of sales, or the value added of trade. The model also shows that institutions can compensate for low levels of trust-that is, societies with low levels of trust can achieve volumes of trade comparable to those of societies with high levels of trust by spending more resources on increasing the quality of the relevant institutions.

Keywords: trust; volume of trade; social capital; contract enforcement (search for similar items in EconPapers)
JEL-codes: A13 D00 Z13 (search for similar items in EconPapers)
Pages: 24
Date: 2009-02-04
New Economics Papers: this item is included in nep-pol and nep-soc
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Persistent link: https://EconPapers.repec.org/RePEc:col:000089:005345

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