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Trust and the New Institutional Economics

In: Handbook of New Institutional Economics

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  • Philip Keefer

    (Inter-American Development Bank)

Abstract

This essay reviews a paradox at the heart of the New Institutional Economics: institutions resolve problems of mistrust, but mistrust undermines the efficacy of institutions. Mistrust and opportunistic behavior drive the principal-agent and collective action dilemmas that are central to the New Institutional Economics, but also interfere with the institutional and organizational reforms that can resolve these dilemmas. The extrinsic and intrinsic drivers of untrustworthy, opportunistic behavior are key to addressing the paradox. The NIE agenda focuses most on reforms that reduce extrinsic incentives (reputational, financial, judicial, or social) to be untrustworthy and act opportunistically. Intrinsically motivated trustworthy behavior is also key to solving the two dilemmas, however. Institutions that support social networks and reduce social distance strengthen this intrinsic motivation.

Suggested Citation

  • Philip Keefer, 2025. "Trust and the New Institutional Economics," Springer Books, in: Claude Ménard & Mary M. Shirley (ed.), Handbook of New Institutional Economics, edition 0, chapter 37, pages 975-1000, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-50810-3_37
    DOI: 10.1007/978-3-031-50810-3_37
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