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Trust and the Distribution of Caution

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  • Breuer, Janice Boucher
  • McDermott, John

Abstract

Trust is often considered a determinant of economic performance. The exogeneity of trust, however, is questionable. We develop a model with heterogeneous agents to determine aggregate trustworthiness, trust, and output. People differ according to their risk aversion (caution). The distribution of risk aversion across individuals -- along with the threat of punishment -- is critical in the process by which trust is formed. The mean and variance of the distribution of caution have direct and indirect effects on trust. For the mean, the direct effect of caution is intuitive: societies with more cautious populations would have less trust. The indirect effect, however works through the perception of trustworthiness and leads to more trust. The net effect is, paradoxically, positive in homogenous societies. In heterogeneous societies, the reverse is true. Trust and output are endogenous, and not monotonically related across countries with different moments of the distribution of caution.

Suggested Citation

  • Breuer, Janice Boucher & McDermott, John, 2009. "Trust and the Distribution of Caution," MPRA Paper 18112, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:18112
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    References listed on IDEAS

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    Cited by:

    1. Breuer, Janice Boucher & McDermott, John, 2012. "Culture, caution, and trust," Journal of Development Economics, Elsevier, vol. 97(1), pages 15-23.

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    More about this item

    Keywords

    trust; trustworthiness; risk aversion; caution; output;
    All these keywords.

    JEL classification:

    • Z1 - Other Special Topics - - Cultural Economics
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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