Trust and Vulnerability

Chris Bidner and Ken Jackson ()

No 2012-09, Discussion Papers from School of Economics, The University of New South Wales

Abstract: By facilitating mutually beneficial transactions, trust is a crucial ingredient for economic development. We explore the determinants of trust by studying a model in which agents rely on imperfectly enforceable contracts to support cooperation in a prisoners’ dilemma production game. We show how a fundamental relationship between vulnerability and trust emerges when players observe private signals of the strength of contract enforceability, even in the limit as signal noise vanishes. In uncovering this relationship, the model demonstrates the importance of social institutions in the development process. We show stronger social institutions, by reducing vulnerability, increase equilibrium trust, promote the use of superior technologies, and interact with formal legal institutions.

Keywords: trust; global games; institutions; social protection. (search for similar items in EconPapers)
JEL-codes: D82 O10 O43 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2011-10
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