Trust and Efficiency

44 Pages Posted: 15 Mar 2000

See all articles by Ralph Chami

Ralph Chami

International Monetary Fund (IMF)

Connel Fullenkamp

Duke University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2001

Abstract

This paper uses the economics of altruism to show how the presence or absence of trust between employees of the firm affects economic efficiency. We develop a simple model in which trust is defined as reciprocal altruism between two employees and show that the presence of trust improves efficiency by mitigating principal-agent problems. Firms characterized by trust between employees are more profitable and have higher levels of employee satisfaction than firms from which trust is absent. We also compare the effects of trust to those of profit-sharing plans and argue that cultivating trust in the firm is easier to implement.

Keywords: Trust, Altruism, Efficiency, Principal-Agent, Moral Hazard, Asymmetric Information

JEL Classification: G3, D64, D63, D8

Suggested Citation

Chami, Ralph and Fullenkamp, Connel, Trust and Efficiency (July 2001). Available at SSRN: https://ssrn.com/abstract=206368 or http://dx.doi.org/10.2139/ssrn.206368

Ralph Chami (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6039 (Phone)
202-623-6068 (Fax)

Connel Fullenkamp

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
(919) 660-1800 (Phone)

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