The Causal Effect of Trust

74 Pages Posted: 19 Nov 2018

See all articles by Björn Bartling

Björn Bartling

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Ernst Fehr

University of Zurich - Department of Economics

David Huffman

IZA Institute of Labor Economics; Swarthmore College

Nick Netzer

University of Zurich

Multiple version iconThere are 4 versions of this paper

Abstract

Trust affects almost all human relationships – in families, organizations, markets and politics. However, identifying the conditions under which trust, defined as people's beliefs in the trustworthiness of others, has a causal effect on the efficiency of human interactions has proven to be difficult. We show experimentally and theoretically that trust indeed has a causal effect. The duration of the effect depends, however, on whether initial trust variations are supported by multiple equilibria.We study a repeated principal-agent game with multiple equilibria and document empirically that an efficient equilibrium is selected if principals believe that agents are trustworthy, while players coordinate on an inefficient equilibrium if principals believe that agents are untrustworthy. Yet, if we change the institutional environment such that there is a unique equilibrium, initial variations in trust have short-run effects only. Moreover, if we weaken contract enforcement in the latter environment, exogenous variations in trust do not even have a short-run effect. The institutional environment thus appears to be key for whether trust has causal effects and whether the effects are transient or persistent.

Keywords: trust, causality, equilibrium selection, belief distortions, incomplete contracts, screening, institutions

JEL Classification: C91, D02, D91, E02

Suggested Citation

Bartling, Björn and Fehr, Ernst and Huffman, David and Netzer, Nick, The Causal Effect of Trust. IZA Discussion Paper No. 11917, Available at SSRN: https://ssrn.com/abstract=3286177 or http://dx.doi.org/10.2139/ssrn.3286177

Björn Bartling (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Ernst Fehr

University of Zurich - Department of Economics ( email )

Blümlisalpstrasse 10
Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

David Huffman

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Swarthmore College

500 College Ave
Swarthmore, PA 19081
United States

Nick Netzer

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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