The Cost of Trust: A Pilot Study

28 Pages Posted: 9 Aug 2018

See all articles by Sinclair Davidson

Sinclair Davidson

RMIT University - School of Economics, Finance and Marketing

Mikayla Novak

RMIT University

Jason Potts

RMIT University

Date Written: July 24, 2018

Abstract

Trust is a fundamental precondition underpinning exchange and economic coordination between heterogeneous agents, but is costly to maintain. Given the potential for agents to enjoy zero-sum gains by opportunistically betraying the trust of exchanging counterparties, an edifice of occupational roles, organisational forms and institutional practices have emerged in an effort to uphold trustworthy behaviour and conduct. In simple terms, there exists a “cost of trust” and this cost is non-trivial for a highly specialised economy operating at an increasingly global scale. This paper provides numerical estimates of the cost of trust for the United States economy, based on an attribution of labour force occupational data with varying degrees of trust-maintenance. Occupations which are represented in high cost-of-trust activities include managers, lawyers and judges, tax professionals, accountants and auditors. Overall, it is estimated that the cost of trust accounts for 35 per cent of U.S. employment in 2010. The cost of trust has significant implications for the economic applicability of distributed ledger technologies, such as blockchain, compared with conventional forms of ledger technology largely maintained by centralised third-party organisations.

Keywords: blockchain, measurement, opportunism, transaction costs, trust

JEL Classification: D02, J21, K42, O33, Z13

Suggested Citation

Davidson, Sinclair and Novak, Mikayla and Potts, Jason, The Cost of Trust: A Pilot Study (July 24, 2018). Available at SSRN: https://ssrn.com/abstract=3218761 or http://dx.doi.org/10.2139/ssrn.3218761

Sinclair Davidson

RMIT University - School of Economics, Finance and Marketing ( email )

445 Swanston Street
Melbourne, Victoria 3000
Australia
+61-3-9925-5869 (Phone)
+61-3-9925-5986 (Fax)

Mikayla Novak (Contact Author)

RMIT University ( email )

124 La Trobe Street
Melbourne, 3000
Australia

Jason Potts

RMIT University ( email )

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