Trust and Prosperity

Why societies where people trust each other tend to be richer, how economists measure trust, and why it matters for markets.

The Nobel prize-winning economist Kenneth Arrow wrote in 1972 that “virtually every commercial transaction has within itself an element of trust”. When people can trust each other, economic life becomes much easier.

Why trust matters

Lower transaction costs: when people trust each other, they need fewer contracts, lawyers, checks and guarantees.
More trade: people are willing to deal with strangers.
Investment: investors are more willing to commit money over long periods.
Cooperation: people work together in firms, communities and public projects.

Measuring trust

Surveys such as the World Values Survey ask: “Generally speaking, would you say that most people can be trusted, or that you need to be very careful in dealing with people?” The share answering that most people can be trusted varies enormously: high in countries like Denmark, Norway and Sweden, and much lower in many other countries.

Trust and income

Research by economists including Stephen Knack and Philip Keefer, and later by Yann Algan and Pierre Cahuc, found that countries with higher trust tend to have higher incomes and growth. Algan and Cahuc used the trust levels of descendants of immigrants in the United States, inherited from their ancestors’ countries, to argue that trust has a causal effect on economic development.

Where trust comes from

History: research has linked the slave trades in Africa to lower trust today.
Institutions: fair courts and honest governments encourage trust.
Inequality: more unequal societies tend to have lower trust.
Experience: repeated interactions and reputations build trust.

Doing business with a stranger

In a high-trust society, a small business owner may accept an order from a new customer and ship goods before being paid, confident of payment. In a low-trust society, the owner demands cash upfront, limiting sales. Across an economy, such differences add up to large effects on trade and growth.

Thinking trust is just a personal feeling

Trust has economic effects: it lowers the cost of doing business and encourages investment and cooperation. It can also be shaped by institutions and policies.

Key takeaways

Kenneth Arrow noted that almost every transaction involves trust.
Trust lowers transaction costs and encourages trade, investment and cooperation.
Trust levels vary widely between countries, as surveys show.
Research suggests higher trust contributes to higher incomes.