Building Trust: Public Policy, Interpersonal Trust, and Economic Development

22 Pages Posted: 1 May 2002

See all articles by Stephen Knack

Stephen Knack

World Bank - Development Research Group (DECRG)

Paul J. Zak

Claremont Graduate University - Center for Neuroeconomics Studies

Date Written: March 2002

Abstract

Zak & Knack (2001) demonstrate that interpersonal trust substantially impacts economic growth, and that sufficient interpersonal trust is necessary for economic development. To investigate the ability of policy-makers to affect trust levels, this paper builds a formal model characterizing public policies that can raise trust. The model is used to derive optimal funding for trust-raising policies when policy-makers seek to stimulate economic growth. Policies examined include those that increase freedom of association, build civic cultures, enhance contract enforcement, reduce income inequality, and raise educational levels. Testing the model's predictions, we find that only freedom, redistributive transfers, and education efficiently and robustly stimulate prosperity. They do this by strengthening the rule of law, reducing inequality, and by facilitating interpersonal understanding, all of which raise trust.

Keywords: Trust, Growth, Policy, Education, Inequality

JEL Classification: D9, D82, D31

Suggested Citation

Knack, Stephen and Zak, Paul J., Building Trust: Public Policy, Interpersonal Trust, and Economic Development (March 2002). Available at SSRN: https://ssrn.com/abstract=304640 or http://dx.doi.org/10.2139/ssrn.304640

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

Paul J. Zak (Contact Author)

Claremont Graduate University - Center for Neuroeconomics Studies ( email )

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

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