Trust in the New Economy

Trust in the New Economy by Avner Ben-Ner and Louis Putterman June 2002 Introduction What do trust and the economy have to do with each other? In a world of perfect and symmetric information, where all related economic actions are simultaneous and occur in one place, the economy runs in the familiar fashion of the perfectly competitive market. In such a world, trust among economic actors is not needed. But in the real – and the virtual – worlds, there are some elements of many transactions that neither party can observe while the transaction is taking place, and other elements that are observed by only one party. Often one party’s action precedes that of the other, but the first action is predicated on the execution of the latter. A buyer, e.g., pays with the expectation of subsequent delivery of a product with certain attributes. Or the buyer pays for a product or a service the quality of which she can judge only later. While some issues associated with asymmetric information and the absence of simultaneity between related actions have been examined extensively in the literature in the context of agency theory and other areas of economics, other issues have received less attention. Many transactions in the new economy, for instance, entail the transmittal of information (credit card details, address, etc.) that may be used against the wishes and interests of the person supplying it. How important to the consumer is protection from such abuses, and how can it be made affordable?