Trust and its Implications for Economic Activity, Welfare and Globalisation

Clement Tisdell

No 90617, Economic Theory, Applications and Issues Working Papers from University of Queensland, School of Economics

Abstract: According to The Macquarie Dictionary, the word ‘trust’ has more than 20 interpretations in English. Therefore, it is important to specify the way in which the word is being used in any discourses about managerial and economic issues. In what respect and to what extent are economic agents to be trusted in their dealings with others. When economic agents are untrustworthy, this adds to economic transaction costs, reduces the level of economic activity and the achievable level of economic welfare as well as potential gains from growing globalisation. Several adverse economic consequences of lack of business trust are explored along with their consequences for the process of globalisation. Business co-operation and alliances can be important for gaining access to international markets, particularly for small and medium-sized firms. Middle traders can play an important role through their cooperation with smaller producers in enabling their products to be exported. However, suppliers at the bottom of the exchange chain tend to become locked into such cooperative arrangements. This can result in their economic exploitation and growing mistrust of such arrangements. Furthermore, once exploitation by a few middlemen occurs, competitors may be forced to follow their practice. Hence, the bad middlemen drive out the good and cooperative institutional arrangements can be expected to collapse with adverse impacts on economic activity, welfare and exports. Trust is also important in relation to most contracts and the sale of goods. As pointed out by Williamson, most contracts are incomplete and rely for their full execution on some degree of trust or unspecified expectations. There ‘reasonable’ expectations may vary from country to country and this creates a challenge for global transactions. Furthermore, trust problems are important in relation to principal-agent contracts which are invariably incomplete. Global operations of businesses can provide extra scope for agents to engage in deviant behaviour. Sale of goods can also involve distrust. Scope for fraud and misrepresentation of goods can increase when there is considerable distance between the traders as is often the case in global exchanges. This limits the incentive for trade and can result in market failure and a loss of economic welfare. It reduces the potential extent of and benefits from economic globalisation. Measures that can or have been adopted to reduce these problems are outlined

Keywords: Institutional and Behavioral Economics; International Relations/Trade (search for similar items in EconPapers)
Pages: 14
Date: 2008-04
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:uqseet:90617

DOI: 10.22004/ag.econ.90617

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