Social Trust and Economic Governance

The paper investigates the dynamic relationship between social trust and economic governance using a principal-agent model with stochastic returns. To mitigate the inherent moral hazard problem both intrinsic and extrinsic incentives are useful. The cooperative tendency of an agent measures his intrinsic discipline against shirking, the distribution of which characterizes social trust in society. The economic governance methods include direct monitoring and efficiency wage. The main results are the following. An agent with a higher cooperative tendency needs less monitoring and a lower wage to make effort, which brings higher profit for the principal. But competition among principals for more cooperative agents drains away the extra profit and passes it on to the agent as a sign-in bonus. So an agent with a higher cooperative tendency ends up earning a higher total income. In the short run when cooperative tendencies are fixed, the distribution of economic governance intensity in the economy is detrmined by social trust. In the long run when cooperative tendencies are endogenously formed to maximize an agent’s lifetime utility, both social trust and economic governance are determined by fundamentals such as the costs of monitoring, screening, and investing in cooperative tendency. In the steady state, social trust increases in monitoring cost and decreases in screening and investing costs. An important insight the paper delivers is that principals always benefit from a lower monitoring cost but not necessarily from a higher social trust. Both downward and upward movement of social trust and economic governance, once started, would continue monotonically. Their relative strength across societies is preserved or reinforced over time.

To Trust or to Monitor: A Dynamic Analysis

In a principal?agent framework, principals can mitigate moral hazard problems not only through extrinsic incentives such as monitoring, but also through agents intrinsic trustworthiness. Their relative usage, however, changes over time and varies across societies. This paper attempts to explain this phenomenon by endogenizing agent trustworthiness as a response to potential returns. When monitoring becomes relatively cheaper over time, agents acquire lower trustworthiness, which may actually drive up the overall governance cost in society. Across societies, those giving employees lower weights in choosing governance methods tend to have higher monitoring intensities and lower trust. These results are consistent with the empirical evidence.Monitoring , Trustworthiness , Trust , Screening , Economic Governance

The Transition from Relational to Legal Contract Enforcement

This paper studies the transition of contract enforcement institutions. The prevalence of relational contracts, low legal quality, strong cultural preference for personalistic relationships, low social mobility, and highly unequal endowment form a cluster of mutually reinforcing institutions that hinder economic development. The cultural element per se does not necessarily reduce social welfare though it may slow down the legal development, while the real problem lies in endowment inequality and low social mobility. Thus a more equal distribution of resources may be the ultimate key to unravel the above interlocking institutions. These results are generally consistent with the empirical evidence.relational contract, legal contract enforcement, institutions, endowment inequality, economic development

What Matter for Child Development?

This paper estimates production functions of child cognitive and social development using a panel data of nine-year old children each with over two hundred home and school inputs as well as family background variables. A tree regression method is used to conduct estimation under various speci.cations. A small subset of inputs is found consistently important in explaining variances of child development results, including the number of books a child has at various ages and how often a mother reads to child by age .ve, while the eects of race and maternal employment are negligible when detailed inputs are controlled.child development, tree regression method, panel data

The Coevolution of Economic and Political Development

This paper establishes a simple model of long run economic and political development, which is driven by the inherent technical features of different factors in production, and political conflicts among factor owners on how to divide the outputs. The main capital form in economy evolves from land to physical capital and then to human capital, which enables the respective factor owners (landlords, capitalists, and workers) to gain political powers in the same sequence, shaping the political development path from monarchy to elite ruling and finally to full suffrage. When it is too costly for any group of factor owners to repress others, political compromise is reached and economic progress is not blocked; otherwise, the political conflicts may lead to economic stagnation.Economic Development, Political Development, Class Structure, Land, Physical Capital, Human Capital, Monarchy, Suffrage Extension

What Matter for Child Development?

This paper estimates production functions of child cognitive and social development using a panel data of nine-year old children each with over two hundred home and school inputs as well as family background variables. A tree regression method is used to conduct estimation under various specifications. A small subset of inputs is found consistently important in explaining variances of child development results, including the number of books a child has at various ages and how often a mother reads to child by age five, while the effects of race and maternal employment are negligible when detailed inputs are controlled.child development, tree regression method, panel data inequality, economic development

The Coevolution of Economic and Political Development

This paper establishes a simple model of long run economic and political development, which is driven by the inherent technical features of dierent production factors, and political conicts among factor owners on how to divide the outputs. The main capital form in economy evolves from land to physical capital and then to human capital, which enables their respective owners (landlords, capitalists, and workers) to gain political powers in the same sequence, shaping the political development path from monarchy to elite ruling and finally to full suffrage. When it is too costly for any group of factor owners to repress others, political compromise is reached and economic progress is not blocked; otherwise, the political conicts may lead to economic stagnation.economic development, Political Development, Class Structure, land, Physical Capital, Human Capital, Monarchy, Suffrage Extension

Social Trust, Cooperation, and Human Capital

The importance of social trust on economic growth has been suggested by many empirical works. This paper formalizes the concept of social trust and studies its formation process in a game theoretic setting. It provides plausible explanations for a wide range of empirical and experimental findings. The main results of the paper are as follows. For utility-maximizing players, cooperation arises in one-period prisoner’s dilemmas if and only if there is social trust. The amount of social trust in a given game is determined by the distribution of players’ cooperative tendency. Cooperative tendency is in essence a component of human capital distinct from cognitive ability. Its investment, however, is typically not efficient because the social returns are always strictly larger than individual returns. This positive investment externality leads to multiple equilibria in social trust formation, but a unique stable equilibrium may also exist. The different effects of legal institutions, information structure and education programs on social trust are also investigatedsocial trust, cooperative tendency, prisoner's dilemma

Building Social Trust: A Human Capital Approach

Much evidence suggests individuals differ in their predisposition to cooperate, which is essentially a component of human capital. This paper examines the role of individual cooperative tendencies and their interactions with institutions in generating social trust; it also endogenizes cooperative tendencies using a human capital investment model. Multiple equilibria and ineffciencies exist due to positive externalities. An innovative fi?nding is that, when institutions are more e¤ective in punishing defecting behaviors, more people invest in cooperative tendencies and hence the endogenous social trust is higher, though the equilibrium cooperative tendencies are lower. This paper provides a plausible explanation for many empirical and experimental results

To Trust or to Monitor : A Dynamic Analysis

In a principalagent framework, principals can mitigate moral hazard problems not only through extrinsic incentives such as monitoring, but also through agents intrinsic trustworthiness. Their relative usage, however, changes over time and varies across societies. This paper attempts to explain this phenomenon by endogenizing agent trustworthiness as a response to potential returns. When monitoring becomes relatively cheaper over time, agents acquire lower trustworthiness, which may actually drive up the overall governance cost in society. Across societies, those giving employees lower weights in choosing governance methods tend to have higher monitoring intensities and lower trust. These results are consistent with the empirical evidence.Monitoring, Trustworthiness, Trust, Screening, Economic Governance