Office of Research Social Trust and Economic Governance

The paper investigates the dynamic relationship between social trust and economic governance and provides a possible explanation for their long-term trends and crosssectional variation. To mitigate the inherent moral hazard problem in a principal— agent situation, both intrinsic trustworthiness and extrinsic incentives are useful. The distribution of intrinsic trustworthiness among agents characterizes social trust, which is determined by fundamental forces in society such as the costs of monitoring and screening agents and the cost of inculcating trustworthiness. The trajectories of social trust and economic governance are thus shaped by the reduction rates of these costs, which are ultimately driven by the basic incentive structure that principals benefit from reducing monitoring costs but not screening and inculcation costs, whereas the opposite is true for agents. For instance, social trust declines and economic governance intensity increases over time when monitoring becomes relatively cheaper; they do so at faster rates in societies where more resources are controlled by principals than agents.