Trust, Growth and Development

Abstract

In the introduction, I have stated the motivation for the model I will present in this thesis; trust is an important economic asset and may be vital to industrialization, which in turn is crucial for successful development and increased standards of living in the long run. In the following chapters I will present a model of industrial production and investment, where trust enters the production function and greatly influences investment decisions. In chapter 2, the basic model is presented, firstly, by introducing the economy in which the model unfolds, secondly by presenting the economic agents that enter the model, and lastly, by deducing the agents adjustment and actions. The simple model shows that when successful industrialization is contingent on trust, there are multiple equilibria; the economy may reach either of two possible solutions; one a low trust poverty trap, the other a preferred solution of sustained growth and development. Chapter 3 is an extension of the simple model. The model in this chapter concerns the same economy, and addresses the problems that may arise when there is asymmetric information, and when various types of business contacts differ with respect to trustworthiness. Again two equilibria are possible outcomes. However, it is shown that there are several qualified interpretations of the model; depending on how the population is composed, the predictions of the model will vary. In chapter 3.3, I examine an economy that consists of producers and predators. The economy may find itself in a crime induced low-trust poverty trap, if the ratio of producers to predators is too low. Conversely, if the ratio is favourable, the economy heads towards a benign equilibrium in which the economy will experience sustained growth and development. The other interpretation is presented in chapter 3.4; in an economy of advanced producers and cottage producers, the model predicts either coordination failure and a subsequent poverty trap, or a big push out of poverty. Chapter 4 is an extension to the model as interpreted in chapter 3.4, but the asymmetries of information are less prominent. The predictions of this chapter are that coordination failure (or the big push effect) may occur even when information about business contacts trustworthiness is more readily available. Chapter 5 offers a presentation of the general conclusions, predictions and policy implications of the thesis