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Bartling, B., Fehr, E., Huffmann, D., Netzer, N. (2018). The Causal Effect of Trust. IZA Discussion Paper No. 11917

Trust affects almost all human relationships – in families, organizations, markets and politics. However, identifying the conditions under which trust, defined as people's beliefs in the trustworthiness of others, has a causal effect on the efficiency of human interactions has proven to be difficult. We show experimentally and theoretically that trust indeed has a causal effect. The duration of the effect depends, however, on whether initial trust variations are supported by multiple equilibria. We study a repeated principal-agent game with multiple equilibria and document empirically that an efficient equilibrium is selected if principals believe that agents are trustworthy, while players coordinate on an inefficient equilibrium if principals believe that agents are untrustworthy. Yet, if we change the institutional environment such that there is a unique equilibrium, initial variations in trust have short-run effects only. Moreover, if we weaken contract enforcement in the latter environment, exogenous variations in trust do not even have a short-run effect. The institutional environment thus appears to be key for whether trust has causal effects and whether the effects are transient or persistent.

Authors

Fehr, Ernst

Ernst Fehr has been Professor of Microeconomics and Experimental Economics at the University of Zürich since 1994. He served as director of the Institute for Empirical Research in Economics and chairman of the Department of Economics at the University of Zurich. He currently serves as director...