國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Trust, Individual Income and Nation’s Wealth
This paper presents two modified models in which social trust is constructed in the representative household’s budget constraint. The solutions of both models predict that trust is positively related with the overall output, while the predictions for the growth effect of trust are ambiguous. Using the cross-country data and Chinese province data, we find our result of empirical analysis suggests that trust should only has income effect but no growth effect. Furthermore, we find there’s an important mutually enhancing relationship between human capital and trust. On individual level, the positive income-trust relationship is further verified using the Chinese survey data.
I. Introduction
Ever since Kenneth Arrow (1972, p. 357) recognizing that “it can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence”, economists made considerable efforts with large amount of literature providing reasonable support for Arrow’s conjecture.
Traditionally, economists tend to do analysis under the hypothesis of perfectly rational individuals and model economic transactions relying on contracts enforcing rather than mutual trust. Nevertheless, much evidence from social experiments suggests that individuals’ behavior in real world deviates from the prediction of traditional economic analysis. During the anonymous sequential prisoner’s dilemma experiment, which is the typical Nash equilibrium case, half of the first-move players choose to trust their stranger partner and three-quarters of second-move players choose to repay with the
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
same trust (Berg, Dickhaut, McCabe, 1995; Smith, 1998). These facts reveals the fact that probably we underestimate the power of trust when trying to economically modeling our real living world in the past.
Till now, much efforts has been made to improve the understanding of trust in economic activity and it is generally accepted that trust is positively related with economic performance by reducing transactional costs, providing more incentives to innovate, improving government policy efficiency and by improving the return of human capital (Putnam 1994; Porta et al. 1997; Keefer and Knack, 1997). In Zak and Knack’s work (2001), they provide a general equilibrium heterogeneous agent growth model to determine the consequences of different levels of trust on economic performance, and their empirical result verifies the positive relationship between social trust and economic growth across countries. Apart from the analysis under the macro-level framework, economists recently also noticed the individual trust has substantial impact on personal economic performance. Individual income is hump-shaped in a measure of intensity of trust beliefs (Butler, Giuliano, Guiso, 2016). Highly trusting individuals has higher risk regarding being cheated while too much pessimistic attitude results in tendency to give up risky profit opportunities.
Though both on the country level and individual level, trust has been tested and confirmed to be positive related with economic performance, there’s still little research concerning the subject that to build a bridge to combine both the macro and micro level results systematically. Thus the latter blank is the focus of this paper.
This paper presents a modified RBC model and a modified AK model to approach the mechanism of trust influencing the economic performance in real world. In both models, trust is introduced through a non-discriminative, risky
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
investment market aiming to influence the economic performance. In this investment market, a fully trusted society will repay the principal and all the revenues, while a poorly trusted society indicates that large risk for households to lose all the money. We permit households to choose the degree they invest based on the known social trust level and in this way, the individual investment decision and, in turn, the performance of the economy is characterized by the trust variable. In both models, we show that people tend to invest more with higher social trust level. As a result, higher social trust level predicts both a better welfare for individuals and a better overall output level for society.
However, the growth effect of trust is ambiguous with the two models’
distinguishing results. The RBC model suggest no growth effect while the AK model indicate positive growth effect of trust.
Following the predictions of both models, in the latter part of this paper, we provide empirical analysis to investigate the role of trust in real world economy.
We use both Chinese province data and cross-country data to estimate the macro-level relationship between trust and economic performance. The advantage to introduce Chinese province data, is that it avoid the concern of translation bias in the survey which are commonly reported in cross-country research, and it also provides stronger causality implication as these provinces share a quite similar culture and thus less unidentified interferences than cross-country data. Because the models we introduced provide insights of both growth effect and income effect of trust, we investigate both the links between trust and economic growth, income level. The result of our empirical analysis suggests that trust has only income effect and no growth effect, which is consistent with the predictions of our modified RBC model. For the individual level test, we use Chinese individual data to test both how individual and social trust affect
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
each person’s income. Through the empirical analysis, it is verified that trust has a significantly positive impact on individual income.
This paper is structured as follows. In Section II we present the two modified models and their implications. In Section III, we describe the survey data and present basic descriptive results. In Section IV we test the models’ predictions with empirical analysis both on macro and micro economic performance level, and finally, Section V concludes.
II. The Theoretical Models