The Neuroeconomics of Trust

The traditional view in economics is that individuals respond to incentives, but absent strong incentives to the contrary selfishness prevails. Moreover, this “greed is good” approach is deemed “rational” behavior. Nevertheless, in daily interactions and in numerous laboratory studies, a high degree of cooperative behavior prevails—even among strangers. A possible explanation for the substantial amount of “irrational” behavior observed in markets (and elsewhere) is that humans are a highly social species and to an extent value what other humans think of them. This behavior can be termed trustworthiness—cooperating when someone places trust in us. I also analyze the cross-country evidence for environments that produce high or low trust. A number of recent experiments from my lab have demonstrated that the neuroactive hormone oxytocin facilitates trust between strangers, and appears to induce trustworthiness. In rodents, oxytocin has been associated with maternal bonding, pro-social behaviors, and in some species long-term pair bonds, but prior to the work reviewed here, the behavioral effects of oxytocin in humans had not been studied. This presentation discusses the neurobiology of positive social behaviors and how these are facilitated by oxytocin. My experiments show that positive social signals cause oxytocin to be released by the brain, producing an unconscious attachment to a stranger. I also discuss recent research that manipulates oxytocin levels, and functional brain imaging research on trust.Oxytocin, social capital, neuroeconomics, development, experiments

Genetics, Family Structure, and Economic Growth

Recent biomedical research shows that roughly three-quarters of cognitive abilities are attributable to genetics and family environment. This paper presents a theory of growth in which human capital is determined by inheritable factors and family size. The distribution of income is shown to affect the number of births, with greater inequality raising the fertility rates and reducing output growth in the transitional dynamics. If human or physical stocks are sufficiently low, the model shows that an economy can be caught in a fertility-caused poverty trap, while countries with more resources will converge to a balanced growth path where the average transmission of human capital from parents to childern determines the long-run rate of output growth.genetics; siblings; growth; fertility; human capital

Pairs of Bloch electrons and magnetic translation groups

A product of irreducible representations of magnetic translation group is considered. It leads to irreducible representations which were previously rejected as nonphysical. A very simple example indicates a possible application of these representations. In particular, they are important in descriptions of pairs of electrons in a magnetic field and a periodic potential. The periodicity of some properties with respect to the charge of a particle is briefly discussed.Comment: 4 pages, RevTex. Latex2.09, amsfont

Periodic and discrete Zak bases

Weyl's displacement operators for position and momentum commute if the product of the elementary displacements equals Planck's constant. Then, their common eigenstates constitute the Zak basis, each state specified by two phase parameters. Upon enforcing a periodic dependence on the phases, one gets a one-to-one mapping of the Hilbert space on the line onto the Hilbert space on the torus. The Fourier coefficients of the periodic Zak bases make up the discrete Zak bases. The two bases are mutually unbiased. We study these bases in detail, including a brief discussion of their relation to Aharonov's modular operators, and mention how they can be used to associate with the single degree of freedom of the line a pair of genuine qubits.Comment: 15 pages, 3 figures; displayed abstract is shortened, see the paper for the complete abstrac

Building trust: public policy, interpersonal trust and economic development

Zak & Knack (2001) demonstrate that interpersonal trust substantially impacts economic growth, and that sufficient interpersonal trust is necessary for economic development. To investigate the ability of policy-makers to affect trust levels, this paper builds a formal model characterizing public policies that can raise trust. The model is used to derive optimal funding for trust-raising policies when policy-makers seek to stimulate economic growth. Policies examined include those that increase freedom of association, build civic cultures, enhance contract enforcement, reduce income inequality, and raise educational levels. Testing the model's predictions, we find that only freedom, redistributive transfers, and education efficiently and robustly stimulate prosperity. They do this by strengthening the rule of law, reducing inequality, and by facilitating interpersonal understanding, all of which raise trust.trust, growth, inequality, rule of law, property rights, development

Political Risk and Capital Flight

Capital flight often amounts to a substantial proportion of GDP when developing countries face crises. This paper presents a portfolio choice model that relates capital flight to rate of return differentials, risk aversion, and three types of risk: financial risk, political risk, and policy risk. Estimating the equilibrium capital flight equation for a panel of 47 developing countries over 16 years, we show that all three types of risk have a statistically significant impact on capital flight. Quantitatively, political risk is the most important factor causing capital flight. We also identify several political factors that reduce capital flight by signaling market-oriented reforms are imminent.capital flight; political risk; policy risk; portfolio choice

Growth of Government And The Politics of Fiscal Policy

U.S. government expenditures increased rapidly during the post-war period, then slowed in the 1980s and began falling in 1992. To examine the dynamics of the growth and subsequent reduction in government spending, we present a dynamic general equilibrium model in which politicians choose government spending to maximize support by their constituents. The model predicts that government expenditures will initially mimic Wagner's law - the tendency for government spending to increase with GDP - but eventually diverge from output due to the growth of the welfare state. After government expenditures become large, we identify an endogenous threshold on the economy's growth path where it is optimal for politicians to shrink the welfare sate, cut taxes, and stimulate output growth. We show that the policies chosen by politicians are Pareto suboptimal and cause endogenous cycles in output. Such cycles are of several types, and we characterize when the equilibrium growth path will result in a reduction in the size of the welfare state, as well as when the welfare state cycles between small and large.government expenditures; growth; Wagner's Law; endogenous cycles