Social Relationships and Trust

35 Pages Posted: 14 Jul 2010

See all articles by Christine Binzel

Christine Binzel

Heidelberg University - Alfred Weber Institute for Economics

Dietmar Fehr

Heidelberg University - Alfred Weber Institute for Economics

Date Written: May 1, 2010

Abstract

While social relationships play an important role for individuals to cope with missing market institutions, they also limit individuals' range of trading partners. This paper aims at understanding the determinants of trust at various social distances when information asymmetries are present. Among participants from an informal housing area in Cairo we find that the increase in trust following a reduction in social distance comes from the fact that trustors are much more inclined to follow their beliefs when interacting with their friend. When interacting with an ex-ante unknown agent instead, the decision to trust is mainly driven by social preferences. Nevertheless, trustors underestimate their friend's intrinsic motivation to cooperate, leading to a loss in social welfare. We relate this to the agents' inability to signal their trustworthiness in an environment characterized by strong social norms.

Keywords: Trust, Hidden Action, Social Distance, Solidarity, Reciprocity, Economic Development

JEL Classification: C72, C93, D82, O12

Suggested Citation

Binzel, Christine and Fehr, Dietmar, Social Relationships and Trust (May 1, 2010). DIW Berlin Discussion Paper No. 1007, Available at SSRN: https://ssrn.com/abstract=1639472 or http://dx.doi.org/10.2139/ssrn.1639472

Christine Binzel (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

Bergheimer Straße 58
Heidelberg, 69115
Germany

Dietmar Fehr

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

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