Trust

Background

In economic terms, trust plays a significant role whenever transactions involve asymmetric information, where one party possesses more or better information than the other. The concept is critical in understanding how agents interact, make decisions, and establish relationships despite knowledge imbalances.

Historical Context

Trust has been studied extensively in the field of economics and game theory, particularly since the late 20th century. Economists and theorists have sought to understand how trust can emerge, sustain, or dissolve in various market situations, particularly those involving long-term interactions and repeated games.

Definitions and Concepts

Trust: In economics, trust refers to a situation in a game with asymmetric information where an agent is expected by other agent(s) to behave in a particular way or to perform a particular action. For example, when the quality of a product is known to the seller but not to the buyer, a buyer may expect, or trust, that the seller is offering a high-quality product.

Equilibrium with trust can be difficult to achieve in a static game due to the lack of mechanisms to reward or punish behavior, but it can arise in a repeated game context. In these dynamic settings, strategies such as trigger strategies enable the establishment and maintenance of trust.

Major Analytical Frameworks

Classical Economics

Classical economists traditionally did not focus on the concept of trust explicitly. They emphasized self-interest and competitive markets without analyzing the internal dynamics of relationships and trust.

Neoclassical Economics

Neoclassical economics recognizes the implications of asymmetric information but mainly through models of principal-agent problems and signaling. Trust is an implicit part of these frameworks but not typically the primary focus.

Keynesian Economic

Keynesian economics does not traditionally include explicit theoretical musings on trust but implicitly acknowledges the necessity of consumer and business confidence for economic stability and growth.

Marxian Economics

Marxian economics might focus on trust in the context of labor relationships and critique how capitalist structures can manipulate or exploit trust among workers and employers.

Institutional Economics

Institutional economics places significant emphasis on trust, as institutions are seen as the rules that shape economic behavior, helping to foster and maintain trust among economic agents.

Behavioral Economics

Behavioral economics studies trust extensively, utilizing psychological insights to understand why and how individuals place trust in others, sometimes irrationally, and how this impacts economic decisions.

Post-Keynesian Economics

Post-Keynesian economics views trust as important for long-term investment and economic stability, emphasizing the role of historical context and changings in consumer and business confidence.

Austrian Economics

Austrian economists appreciate trust for facilitating market processes, understanding interpersonal exchanges, and maintaining social order within the structure of voluntary transactions.

Development Economics

In development economics, trust is crucial for fostering cooperation among various stakeholders, developing social capital, and successfully implementing economic policies and projects.

Monetarism

Monetarists may consider trust in relation to the credibility and predictability of monetary policies, which affect inflationary expectations and economic stability.

Comparative Analysis

Comparing different traditions, trust emerges as both a foundational theme and a mechanism that strengthens market and non-market relationships. While classical and neoclassical approaches focus on equilibrium and utility, institutional, behavioral, and development economics tend to highlight the evolving, sociocultural aspects of trust.

Case Studies

Case studies on trust often examine scenarios where long-term relationships and reputations play crucial roles, such as international trade relationships, credit markets, and consumer-brand relationships.

Suggested Books for Further Studies

“Trust: The Social Virtues and The Creation of Prosperity” by Francis Fukuyama
“The Economics of Trust: Trust in Gender Relations” by Mari Sako
“Games and Information: An Introduction to Game Theory” by Eric Rasmusen

Asymmetric Information: A situation where one party in a transaction has more or superior information compared to another.
Repeated Game: A standard game, typically with a finite set of players and potential strategies, that is played multiple times.
Trigger Strategies: Strategies used in repeated games where cooperation is maintained through the threat of reverting to a non-cooperative equilibrium if trust is broken.