Trusting And Non-Trusting: Comparing Benefits, Cost And Risk

Abstract:     
The Article deals with trusting (reasonable belief in facts and promises) focusing mainly on business and finance relationships. A simple and familiar method is used for evaluating net benefits from trusting, by listing benefits (reduced verification and monitoring costs), cost (establishing relationships, lost opportunities) and risk of trusting relationships, covering both individuals and systems. The article outlines the strategies for reducing the costs and risks from trusting (markets and self-protections mechanisms), highlighting the cost and risk reduction by impersonal trusting in institutions (financial intermediaries and the financial system). Such impersonal trusting, however, must be strongly backed by law and law enforcement, and shape market norms. The Article expresses great concern at recent legal literature that preaches contract as the overall legal model subsuming fiduciary law, intercorporate relationships, and relationship to investors in business trusts and clients of other money managers. The Article compares the contract model (individualism, self-protection, minimal government interference and "on your guard" attitude of non-trusting) to fiduciary and statutory regulation models (dependence, reliance and greater trusting). The article suggests that in the current environment, where trusting in the financial system and emerging electronic commerce is crucial, the time has come to put contract where it should belong and balance it well against a trusting legal models.

JEL Classifications: K0

Working Paper Series