Behavioral Economics for Leaders

CHAPTER 31Trust Is an Economic Asset; Lack of Trust Is Expensive

Trust is an important asset, not only in interpersonal relationships but also for the productivity of companies and for the growth of the economy. The economic significance of trust arises from the fact that most contracts are incomplete and do not regulate everything.

What would you answer to the following question? “Generally speaking, would you say you can trust most people or that you cannot be careful enough in dealing with other people?” The question is worded somewhat vaguely. Nonetheless, most people understand the question, and how they answer it has a lot to do with the economy and prosperity.

But first things first. The previous question comes from the World Value Survey that queries attitudes toward social, ethical, or political values in a number of countries. About 25 years ago, Stephen Knack and Philipp Keefer of the World Bank published a journal article that demonstrated the importance of trust as a “soft” production factor. Based on the data from 29 industrialized countries, the authors were able to show that average economic growth was greater in a country the more often its citizens agreed with the World Value Survey statement that, generally, you can trust most people. This result held true even when a number of other crucial variables were taken into account (e.g., educational level or inflation rate). Why is trust important for economic growth and thus prosperity?

Let’s look at a few everyday ...