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Honesty and Trade

Michael Rauh () and Giulio Seccia
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Giulio Seccia: University of Shouthampton

No 2014-06, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: There is substantial evidence that many parents value honesty in their children and that trust is an important determinant of trade. There is also evidence that certain institutions (i.e., religious institutions) foster trust, trade, and economic growth. In this paper we consider a parent who can enroll her child in an imperfect institution which can make her child honest with some probability less than one. We assume that institutional membership is observable so that institutions serve as both imperfect socialization technologies and potentially informative signals that such socialization has taken place. We provide necessary and sucient conditions for nonzero investments in honesty in the two main benchmark models of exchange under asymmetric information: the basic two-type screening model and a game-theoretic version of Akerlof's market for lemons. Consistent with the evidence, we show that when non-zero socialization occurs in equilibrium it improves economic performance by increasing allocative eciency in the screening model and reducing adverse selection in the market for lemons.

Keywords: deception; exchange; honesty; institutions; religion; trade; trust (search for similar items in EconPapers)
JEL-codes: D02 D03 D82 Z1 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-cta, nep-evo, nep-mic and nep-soc
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