Carlo Hamalainen

Neuroeconomics of trust


An interesting paper by Paul J. Zak: (local copy).

Some quotes:

The Zak & Knack model shows that trust is directly related to economic growth by reducing transaction costs and facilitating investment. Empirically, trust is among the powerful factors economists have discovered that promote growth. The analysis in Zak & Knack (2001) shows that a 15 percentage point increase in the proportion of people in a country who think others are trustworthy raises income per person by 1% per year for every year thereafter. For example, if trust in the U.S. increased from its current level of 36% to 51%, average income would rise by about $400 per year thereafter due to the additional business investment and job creation. The impact of trust on living standards is quantitatively large; $400 per year corresponds to an additional $30,000 in average lifetime income.

Zak & Knack (2001) also show that if trust is sufficiently low (below 30% for the average country in Figure 1), then the investment rate will be so low that living standards will stagnate or even decline. This “poverty trap” is primarily due to ineffective formal institutions that result in low levels of generalized trust. The model shows that the threshold level of trust necessary for positive economic growth is increasing in per capita income. As a result, it appears to be difficult to escape from a low-trust poverty trap without outside intervention.