Source: Algan, Y. and P. Cahuc (2014), “Trust, growth and well-being: New evidence and policy implications,” in Aghion, P. and S. Durlauf (eds.), Handbook of Economic Growth, Vol. 2, Elsevier, North-Holland, Amsterdam, pp. 49–120. StatLink 2 http://dx.doi.org/10.1787/888933840019.
Early research on the roots of economic development stressed the role of technological progress and the accumulation of human and physical capital. But since those factors were unable to explain a large share of the cross-country differences in income per capita, the focus has progressively shifted to the role of formal institutions (North, 1990), considered as factors that support or weaken market institutions (Stiglitz and Arnott, 1991) and that shape the incentives to accumulate wealth and innovate (Acemoglu, Robinson, and Johnson, 2001; World Bank, 2002); and the focus has shifted to determining what extent those institutions could be distinguished from factors like human capital (Glaeser et al., 2004). More recently, attention has been directed toward deeper factors, in particular social capital and trust. Since the ground-breaking work of Banfield (1958), Coleman (1974), and Putnam (2000), generalized inter-personal trust—broadly defined as cooperative attitude outside the family circle—has been considered by many social scientists as a key driver of many economic and social outcomes (Knack and Keefer, 1997; Dasgupta and Serageldin, 2000; Dasgupta, 2005).
Arrow (1972) gives one likely explanation for the role of trust in economic development: “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”
Arrow’s intuition is straightforward. In a complex society, it is impossible to write down and enforce detailed contracts that encompass every possible state of the world for economic exchanges. Ultimately, in the absence of informal rules established by trust and trustworthiness, markets are missing, gains from economic exchanges are lost, and resources are misallocated. In that respect, trust and the informal rules shaping cooperation could explain differences in economic development. Arrow (1972) considers trust as being at the core of economic exchange in the presence of transaction costs that impede information and contracts. Fundamentally, the economic efficiency of trust flows from the fact that it favors cooperative behavior and thus facilitates mutually advantageous exchanges in the presence of incomplete contracts and imperfect information. In Arrow’s term, trust in others acts as a lubricant to economic exchange.
Trust is critical to the well-being of citizens. Inter-personal trust does not only matter for economic outcomes. People seem to have more satisfying lives when they live in an environment of trust and trustworthiness, and when they are more trusting and trustworthy themselves, even controlling for income. For example, it seems that the nonmonetary dimension of having cooperative social relationships with others affects health and happiness above and beyond the monetary gains derived from cooperation.
Panel A of Figure 10.2 illustrates this relationship by using measures of life satisfaction from the World Values Survey question: “All things considered together, how satisfied are you with your life as a whole these days?” Life satisfaction ranges from 1 to 10, a higher score indicating a higher life satisfaction. The correlation between life satisfaction and generalized trust is positive: 17% of the variance in life satisfaction is associated with cross-country differences in generalized trust, with few outliers, like Portugal. Panel B of the same figure also shows a steady positive relationship between generalized trust and life expectancy (OECD, 2016). Similar relationships have been found between generalized trust and different dimensions of health status and health-related behavior (Lochner et al., 2003; Lindström, 2005; Poortinga, 2006; Petrou and Kupek, 2008), and trust and suicide rates (Helliwell, 2007).
Figure 10.2. Generalized Inter-personal Trust, Life Satisfaction, and Life Expectancy, 2002–14
Note: Data on generalized trust is sourced from the European Social Survey, data on life satisfaction is sourced from the Gallup World Poll.
Source: OECD (2017), OECD Guidelines on Measuring Trust, OECD Publishing, Paris. StatLink 2 http://dx.doi.org/10.1787/888933840038.
Trust improves community life and governance. Trust in institutions, or institutional trust, is also a key element of a resilient society and is critical for implementing effective policies, since public programs, regulations, and reforms depend on the cooperation and compliance of citizens (Blind, 2007; OECD, 2013a). Trust in institutions is a key driver of well-being and economic outcomes (OECD, 2015, 2016).
While inter-personal trust is of primary importance for measuring social capital, institutional trust is most relevant to evaluating the effectiveness of government policies and programs (e.g., Klijn, Edelenbos, and Steijn, 2010). When people have a high level of trust in institutions, they are more likely to comply with laws and regulations, and it is easier to implement policies that may involve trade-offs between the short and long term, or between different parts of society, e.g., through taxation or distributive policies (Marien and Hooghe, 2011; OECD, 2013a). Institutional trust is especially important to government activities that address market failures (e.g., health care, education, the environment) or where long-term gains require short-term sacrifices (e.g., education, pensions).
Figure 10.3, from the OECD Guidelines on Measuring Trust (OECD, 2017), shows the relationship between trust in two institutions—the national government and the judiciary—and GDP per capita. In both cases there is a strong positive correlation, in particular in the case of the judiciary. This makes intuitive sense, since the key channels through which institutions affect economic outcomes, such as contract enforcement or regulation of the market place, have a more direct link to the judicial system than to the government more generally. It should be stressed that this correlation could also reflect an impact of GDP per capita on institutional trust, as discussed in the next sections.
Figure 10.3. Trust in Institutions and GDP per Capita, 2006–15
Note: Data on trust in government and on trust in the judicial system are sourced from the Gallup World Poll.
Source: OECD (2017), OECD Guidelines on Measuring Trust, OECD Publishing, Paris. StatLink 2 http://dx.doi.org/10.1787/888933840057.
What Does Trust Mean?
There is an extensive literature on the concept and theories of trust from a wide range of different disciplines within social sciences, including political science, sociology, economics, and psychology. A central feature of this literature is to consider trust as a “cognitive category with knowledge and belief” (Hardin, 2004), stressing that expectations are central, either expectations about the action of others or about the fact that others share the same values (Uslaner, 2008). But beyond this common element, the concept of trust has received many different interpretations, leading to different measures reviewed by OECD (2017) and different policy recommendations (see below). Following the OECD Guidelines, we will define trust as “a person’s belief that another person or institution will act consistently with their expectations of positive behaviour.” The different theories of trust are reviewed below.
Rational Trust
Trust can be thought of as a belief about other people’s trustworthiness, that is, how others are likely to behave toward you. Cooperation is then a strategy to maximize one’s own benefit and can only be sustained through reputation. This strategic nature of rational trust is made clear in the trust game of Berg, Dickhaut, and McCabe (1995). In this framework, two individuals are free to invest—or not—some amount that will enable them to produce jointly. Once they make this investment, the fact that the contracts are incomplete and unenforceable (as there is no way for a third party to verify that everything promised is performed) gives each player the chance to profit from the association at the expense of the other. The only possible outcome of this game is an absence of cooperation such that the players have no interest in participating (“N
ash equilibrium”—a game theory concept where no player can gain anything by changing their chosen strategy if other players do not change theirs). This shows that the absence of cooperation may prevent mutually advantageous exchanges from coming about.
If trust is purely rational (i.e., self-interested), cooperation can only emerge as a reputation device and in presence of punishment. The spontaneous emergence of cooperative behavior in populations of large size is improbable if each individual is a pure homo economicus and they all interact anonymously. If they are not interacting anonymously, that is if people develop reputations over time, cooperation based on reputational trust can emerge, as supported by historical and experimental evidence. Greif (1993, 1994) in his analysis of the Maghribi and Genoese traders, and Dixit (2004) have shown that such cooperation can be supported when there is sufficient transmission of information (that is, a potential partner in a transaction can find out if someone has cheated before because they have a bad reputation), and there is coordinated implementation of strategies intended to punish those caught defecting. This is to say that cooperation may exist in the absence of any formal institution defining legal rules if the size of the population and the preference for the present benefit are sufficiently small. If these conditions are unmet, however, formal institutions explicitly laying down legal rules and sanctions are needed in order to sustain cooperation.
In this way, whether people trust or not depends on their perception of how well societal institutions function. If people believe that strong enforcement mechanisms are in place to discourage cheating or other forms of noncooperative or socially harmful behaviors, they will be more likely to trust others in general (Knack and Keefer, 1997; Rothstein, 2000; Beugelsdijk, 2006). In this case, efficient institutions in which individuals trust are a key driver of trust in others in a cross-section of countries (Rothstein, 2011).
The value of an understanding of trust as strategic and rational is that it highlights the role played by formal institutions in encouraging trust and coordination. However, this view of trust does not account for the cooperative behavior often experimentally observed to arise in anonymous, nonrepetitive, one-off human interactions (Bowles and Gintis, 2007; Fehr, 2009), which has been associated with moral trust and social preferences, as discussed below.
Moral Trust and Social Preferences
The main alternative to a rational notion of trust is the concept of moral trust, whereby trust is a value or preference inherited through socialization rather than a strategy chosen by an individual (OECD, 2017). In this interpretation, trust is still an expectation about how others will behave, but it is not a strategic expectation. In Uslaner’s formulation, trust is a “moral commandment to treat people as if they were trustworthy.” Trust is a belief that others share our fundamental values (Uslaner, 2002), and people extrapolate from their experiences with specific individuals or from their educational and cultural background to extend trust to groups of people with similar characteristics (Farrell, 2009).
In this line, Fukuyama (1995) considers trust as “the expectation that arises within a community of regular, honest, and cooperative behaviour, based on commonly shared norms, on the part of the other members of that community.” A similar definition is also used in the economic literature, where trust and cooperative behaviors are the set of “shared beliefs and values that help a group overcome the free rider problem in the pursuit of socially valuable activities” (Guiso, Sapienza, and Zingales, 2011).
The concept of moral trust emphasizes the existence of an intrinsic motivation and social preferences linked to cooperation and to the psychological or nonmonetary cost of noncooperating (Bowles and Polania-Reyes, 2012). In this perspective, individuals are motivated by more than material payoffs, and value the act of cooperating in itself. In all these settings, individuals are assumed to have social preferences, or other-regarding preferences, and not just self-regarding preferences, which allow cooperation to emerge in anonymous groups of substantial size (see Bowles and Gintis, 2007, for a synthesis).
In this perspective, the literature distinguishes two main social preferences:
• Altruism, where people cooperate with others without expecting any payoff or reciprocity, deriving utility solely from “warm glow preferences” (Andreoni, 1989; Anderson, Goeree, and Holt, 1998).
• Reciprocity, or conditional cooperation, where people cooperate if others cooperate and are reciprocal, but may sanction those who do not respect cooperative norms (Fehr and Schmidt, 1999; Fehr and Gachter, 2000; Gintis et al., 2005; Falk and Fischbacher, 2006; Hoff, Kshetramade, and Fehr, 2011). Individuals display strong betrayal aversion and sanction noncooperative behaviors even if it entails a monetary cost that conflicts with their self-interest (Fehr, 2009).
Types of Trust
Regarding trust between individuals, since the seminal work of Banfield (1958) and Coleman (1990), social scientists have made a distinction between limited morality (directed to people one knows personally) and generalized morality (directed to all people, including strangers). Societies with limited morality promote codes of good conduct within small circles of related persons (family or kin), whereas selfish behavior is regarded as morally acceptable outside the small network. This behavior was described as “amoral familism” by Banfield (1958). Societies with generalized morality promote good conduct outside the small family/kin network, which allows the possibility of identifying oneself with a society of abstract individuals or abstract institutions.1
There is evidence that the two types of morality, generalized and limited morality, are really of two different natures, and may affect outcomes in opposite directions, as suggested initially by Banfield (1958). Ermisch and Gambetta (2010), drawing on a representative sample of the British population, find that people with strong family ties have a lower level of trust in strangers than people with weak family ties, and argue that this association is causal. They show that this owes to the level of outward exposure: factors that limit exposure to outsiders limit subjects’ experience as well as motivation to deal with strangers.
The concept of trust in institutions is at an earlier stage of both theoretical and empirical development than that of inter-personal trust. The idea of institutional trust encompasses the degree to which people trust specific institutions of a political nature (such as the parliament, the police, or the justice system) or nonpolitical nature (such as banks or private business). The theoretical literature generally distinguishes between two main channels of institutional trust: “trust in competence,” i.e., about the competence and knowledge of the persons working in an administration in charge of a public policy; and “trust in intentions,” i.e., about their honesty and integrity (Nooteboom, 2007).
What Is the State of Existing Statistics on Trust?
The growing awareness of the importance of trust in social and economic progress has led to several initiatives to improve and expand measures of trust from the research community, governments, and international organizations. These include the OECD’s Trust Strategy and How Is Life? reports, the UN Sustainable Development Goals, and the Praia City Group on Governance Statistics. Particular attention has been paid by the OECD to better understanding whether the trust measures commonly in use are of sufficient quality and accuracy in order to decide whether they can be considered “fit for purpose” and ready to be collected within official statistics.
Measures of Trust
Survey-Based Measures of Trust
So far, most of the research on the role of trust and cooperation draws on answers to survey questions. A large number of countries are covered by household surveys that have included questions on trust since the beginning of the 1980s. For the most part, these surveys are conducted by nonofficial data producers outside the official statistical system, such as private companies and academic initiatives. Overall, geographic coverage, collection frequency, and sample size vary considerably between surveys. For example, the annual Gallup World Poll has been collectin
g data on institutional trust since 2006. The World Values Survey (WVS) has been collecting data every 5 years since 1981, albeit for a smaller set of countries. The European Social Survey (ESS) has been collecting data every two years since 2002 for European countries and regions. The Latinobarometer has been collecting data for 19 Latin American countries yearly since 1995, and the Afrobarometer has covered 37 countries with a 2-year frequency since 2002. In addition, there have been occasional large-sample collections of data on trust by official data producers: the 2013 EU Statistics on Income and Living Conditions (EU-SILC) module on well-being included a variety of inter-personal and institutional trust questions, the former of which has once again been included in the 2018 version of that module. Individual countries within and beyond the OECD, including the United Kingdom, New Zealand, Australia, Canada, Poland, the Netherlands, Mexico, Peru, Ecuador, Chile, and Colombia have also occasionally collected data on different aspects of social capital, as well as trust in government.
The bulk of the literature on inter-personal trust has focused on trust in people that one does not know personally, as opposed to trust in relatives, family, or neighbors. In surveys, inter-personal trust is most often measured with the “generalised trust question,” first introduced by Almond and Verba (1963) in their study of civil society in post-war Europe: “Generally speaking, would you say that most people can be trusted, or that you can’t be too careful when dealing with others?” Possible answers are either “Most people can be trusted” or “Need to be very careful.”
The same question is used in the European Social Survey (ESS), the US General Social Survey (GSS), the WVS, the Latinobarometer, and the Australian Community Survey. The ESS uses a more neutral wording with an answer on a 0–10 response scale rather than the binary answer where 1 = “Most people can be trusted” and 0 = “Can’t be too careful.” The OECD Guidelines on Measuring Trust (OECD, 2017) also recommend using this neutral wording, as there is evidence that the “Can’t be too careful” phrasing may prime relatively vulnerable groups such as the elderly and women to report lower levels of trust compared with responses to a neutral wording. The Guidelines further suggest that a 0–10 response scale, in lieu of a binary one, allows for a greater degree of variance in responses and increases overall data quality and translatability, which is of particular concern for international comparability.
For Good Measure Page 46