The Right Amount of Trust

84 Pages Posted: 15 Sep 2009 Last revised: 15 Oct 2009

See all articles by Jeffrey V. Butler

Jeffrey V. Butler

Dept. of Economics, University of California, Merced

Paola Giuliano

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF)

Multiple version iconThere are 4 versions of this paper

Date Written: September 2009

Abstract

We investigate the relationship between individual trust and individual economic performance. We find that individual income is hump-shaped in a measure of intensity of trust beliefs. Our interpretation is that highly trusting individuals tend to assume too much social risk and to be cheated more often, ultimately performing less well than those with a belief close to the mean trustworthiness of the population. On the other hand, individuals with overly pessimistic beliefs avoid being cheated, but give up profitable opportunities, therefore underperforming. The cost of either too much or too little trust is comparable to the income lost by forgoing college. We develop a framework to take into account heterogeneity in the trustworthiness of the pool of people with whom individuals interact as well as the presence of heterogenous costs of trust mistakes. Both sources of heterogeneity drive the relationship between trust and income which is hump-shaped for all individuals. This framework allows us to show that income-maximizing trust typically exceeds the trust level of the average person as well as to estimate the distribution of income lost to trust mistakes. We find that although a majority of individuals has well calibrated beliefs, a non-trivial proportion of the population (10%) has trust beliefs sufficiently poorly calibrated to lower income by more than 13%. Our findings hold in large-scale international survey data as well as inside a country with high quality institutions and are also supported by experimental findings.

Suggested Citation

Butler, Jeffrey Vincent and Giuliano, Paola and Guiso, Luigi, The Right Amount of Trust (September 2009). NBER Working Paper No. w15344. Available at SSRN: https://ssrn.com/abstract=1472282

Jeffrey Vincent Butler (Contact Author)

Dept. of Economics, University of California, Merced ( email )

5200 N. Lake Road
Merced, CA 95343
United States

HOME PAGE: http://jeffreyvbutler.org

Paola Giuliano

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IZA Institute of Labor Economics

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

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana 62
Rome, 00187
Italy
+39 06 4792 4858 (Phone)
+39 06 4792 4872 (Fax)

HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

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