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Culture, Caution, and Trust

29 Pages Posted: 18 Sep 2010  

Janice Boucher Breuer

University of South Carolina - Department of Economics

John McDermott

University of South Carolina - Moore School of Business - Department of Economics

Date Written: September 15, 2010

Abstract

Trust is an important determinant of economic development. Understanding its origins is therefore critical. We develop a principal-agent model with heterogeneous players to determine the aggregate amount of trustworthiness and trust in a society. People are distributed according to their preference toward caution, which we model as loss aversion. The first two moments of the distribution across principals and agents -- along with institutional quality -- are critical to the process by which trustworthiness and trust are formed. A direct effect suggests that more caution leads to less societal trust. An indirect effect of greater caution, working through trustworthiness, leads to more trust. Paradoxically, the net effect is almost always positive. The results are similar when we use expected utility theory, but social preferences like betrayal aversion may temper the results.

Keywords: trust, trustworthiness, culture, risk, development

JEL Classification: C7, O1, Z1

Suggested Citation

Breuer, Janice Boucher and McDermott, John, Culture, Caution, and Trust (September 15, 2010). Available at SSRN: https://ssrn.com/abstract=1660633 or http://dx.doi.org/10.2139/ssrn.1660633

Janice Boucher Breuer (Contact Author)

University of South Carolina - Department of Economics ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States
803-777-7419 (Phone)
803-777-6876 (Fax)

John H. McDermott

University of South Carolina - Moore School of Business - Department of Economics ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States

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