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Trust and Trade

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  • Oskar Nupia

Abstract

This paper presents a model demonstrating how trust affects the volume of trade in a society. There are two ways in which this happens. First, at minimum, societies need a certain level of trust in order to observe trading activity. Second, once this minimum condition is satisfied, the probability of observing a larger volume of trade is high only if the level of trust is sufficiently high. Our results help explain empirical findings that demonstrate a positive relationship between trust and the volume of sales, or the value added of trade. The model also shows that institutions can compensate for low levels of trust-that is, societies with low levels of trust can achieve volumes of trade comparable to those of societies with high levels of trust by spending more resources on increasing the quality of the relevant institutions.

Suggested Citation

  • Oskar Nupia, 2009. "Trust and Trade," Documentos CEDE 5345, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:005345
    as

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    File URL: https://repositorio.uniandes.edu.co/bitstream/handle/1992/8090/dcede2009-03.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    trust; volume of trade; social capital; contract enforcement;
    All these keywords.

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • D00 - Microeconomics - - General - - - General
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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