Trust and Growth

Posted: 8 Apr 2002  

Paul J. Zak

Claremont Graduate University - Center for Neuroeconomics Studies

Stephen Knack

World Bank - Development Research Group (DECRG)

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Abstract

Why does trust vary so substantially across countries? This paper presents a general equilibrium growth model in which heterogeneous agents transact and face a moral hazard problem. Agents may trust those with whom they transact, but they also have the opportunity to invest resources in verifying the truthfulness of claims made by transactors. We characterise the social, economic and institutional environments in which trust will be high, and show that low trust environments reduce the rate of investment. The predictions of the model are examined empirically for a cross-section of countries and have substantial support in the data.

Keywords: Trust, Growth, Moral Hazard, Heterogeneity, Inequality, Discrimination, Uncertainty

JEL Classification: D9, D82, D31

Suggested Citation

Zak, Paul J. and Knack, Stephen, Trust and Growth. Economic Journal, Vol. 111, No. 470, March 2001. Available at SSRN: https://ssrn.com/abstract=304639

Paul J. Zak (Contact Author)

Claremont Graduate University - Center for Neuroeconomics Studies ( email )

160 E. 10th St.
Claremont, CA 91711-6165
United States

Stephen Knack

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-458-9712 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/sknack

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