Can Integrity Replace Institutions? Theory and Evidence

Gilad Aharonovitz, Nathan Skuza and Faysal Fahs ()
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Faysal Fahs: School of Economic Sciences, Washington State University

No 2009-06, Working Papers from 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.

Keywords: economic development; institutions; integrity; Lebanon; social norms; trust. (search for similar items in EconPapers)
JEL-codes: A13 C73 E19 O43 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2008-12
New Economics Papers: this item is included in nep-cbe and nep-soc
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