Trust and Trade

24 Pages Posted: 10 Oct 2009

See all articles by Oskar Nupia

Oskar Nupia

Universidad de los Andes, Colombia - Department of Economics

Date Written: February 5, 2009

Abstract

This paper presents a model demonstrating how trust affects the volume of trade in a society. There are two ways in which this happens. First, at minimum, societies need a certain level of trust in order to observe trading activity. Second, once this minimum condition is satisfied, the probability of observing a larger volume of trade is high only if the level of trust is sufficiently high. Our results help explain empirical findings that demonstrate a positive relationship between trust and the volume of sales, or the value added of trade. The model also shows that institutions can compensate for low levels of trust-that is, societies with low levels of trust can achieve volumes of trade comparable to those of societies with high levels of trust by spending more resources on increasing the quality of the relevant institutions.

Keywords: trust, volume of trade, social capital, contract enforcement

JEL Classification: A13, D00, Z13

Suggested Citation

Nupia, Oskar, Trust and Trade (February 5, 2009). Available at SSRN: https://ssrn.com/abstract=1485835 or http://dx.doi.org/10.2139/ssrn.1485835

Oskar Nupia (Contact Author)

Universidad de los Andes, Colombia - Department of Economics ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia

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