Trust and Vulnerability

By facilitating mutually beneficial transactions in the absence of perfect legal institutions, trust is a crucial ingredient for economic development. We focus on the conceptual connections between imperfect legal institutions, uncertainty and vulnerability, and their consequences on trust, with the goal of understanding the role for a social safety net in economic development. We study a model in which agents rely on imperfectly enforceable contracts to support cooperation in a prisoners’ dilemma production game. Defining trustworthiness as the probability that an agent chooses a cooperative action, we demonstrate that when the game retains fundamental uncertainty over the likelihood of cooperation, there is a direct relationship between vulnerability, social safety nets and trustworthiness. We then elaborate on this result, showing how social institutions can promote trust and the adoption of complex production methods. In addition, we show that under reasonable assumptions, the development of social institutions and legal institutions will have complementary effects when institutions are collectively weak.