Three Essays On Trust And Markets
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Choi, Seung Yee
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Abstract
Trust is an important concept for understanding economic, political and social activities and is correlated with various measures of economic performance. It adds greater flexibility in responding to changing environmental conditions, in reducing risk and in promoting coordination. While trust is not a necessary condition for the formation of strong dyadic relationships, it enhances the set of attainable opportunities by the two parties and thus is a desirable relational quality. In the current economic literature on trust and trustworthiness, most attention has been given to studying their impact on various economic performance measures and to identifying their determinants. However, it remains unclear how people decide whom to trust as well as when and why they trust strangers. Given Smith's (1981) observation that an expansion of the market is necessary for nations to prosper, examining how trust facilitates and is fostered in formal institutions such as markets appear crucial for understanding economic development. While it is not a contentious claim to make that trust is present in all (if not most) human exchange, scholars, public intellectuals and everyday citizens seem to reject the notion that the markets can have ameliorative effect on our social relationships. The economy and society are embedded within each other, so it should not conceptually be a stretch to recognize that our economic interactions can also shape our social preferences and behavior, just as how our social interactions can mold our economic preferences and behavior. In fact, these critics and skeptics tend to only focus on the harmful and destructive effects markets can have on our local and global communities and how the expansion of the market and market values taint our relationships and the goods being exchanged, while ignoring their beneficial influences. This dissertation attempts to dispel these fears and examines how the market can foster trust and trustworthiness. In particular, it focuses on how market activities and interactions can foster social relationships based on trust and trustworthiness. Critics of markets have asserted that markets undermine morality and that market dealings are unfair and corrupting. In their perspective, the expansion of the market and market values taint the nature of the goods being exchanged and the relationships between the parties to the deal. The first chapter, titled, "Can Trust, Reciprocity, and Friendship Survive Contact with the Market?" gives reasons to suspect this critique of markets and attempts to push back against these complaints. It argues that the market is a social arena where individuals not only pursue their material goals but also exercise their moral selves; after all, meaningful social bonds characterized by trust and trustworthiness can and do develop in market settings. The market depends on and promotes trust and trustworthiness as well as fairness and reciprocity and these values, as suggested by experimental economic evidence, play important roles in successful market exchanges. The second chapter, titled, "The Emergence of Social Relationships in Markets: An Experimental Analysis" investigates how social ties characterized by trust and reciprocity can be established through market transactions and if these relations affect subsequent behavior in non-market settings. Social capital theory has stressed how individuals benefit in the market from investment in social ties but how market activity and behavior affect social ties has been underexplored. We use a novel two-task experimental design in which subjects are placed in a market setting (where several features of real world markets are retained but where defection rates are expected to be high) and then a trust setting (where key information about their former trading partners is retained). Individuals display significantly higher levels of trust and reciprocity to those with whom they share "positive" relationships; senders and responders transfer 50% more tokens to counterparts with whom they share relationships characterized by successful market trades compared to those with whom they share relationships characterized by defected market trades. The third chapter, titled,"The Market as a Process to Discover Whom to Trust" builds on work within Austrian economics concerning the market as a discovery process (Hayek 1945; Lavoie 1986) and on the market as a social space (Storr 2008; Chamlee-Wright and Storr 2015). Using evidence from the experimental and Austrian economic literature, we argue that the market is a space where people learn about who they can trust and about others' trustworthiness through market interactions.
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Keywords
Economics, Trust, Markets