Building trust: public policy, interpersonal trust and economic development

Knack, Stephen and Zak, Paul J. (2001): Building trust: public policy, interpersonal trust and economic development. Published in: Supreme Court Economic Review , Vol. 10, (2002): pp. 91-107.

Abstract

Zak & Knack (2001) demonstrate that interpersonal trust substantially impacts economic growth, and that sufficient interpersonal trust is necessary for economic development. To investigate the ability of policy-makers to affect trust levels, this paper builds a formal model characterizing public policies that can raise trust. The model is used to derive optimal funding for trust-raising policies when policy-makers seek to stimulate economic growth. Policies examined include those that increase freedom of association, build civic cultures, enhance contract enforcement, reduce income inequality, and raise educational levels. Testing the model's predictions, we find that only freedom, redistributive transfers, and education efficiently and robustly stimulate prosperity. They do this by strengthening the rule of law, reducing inequality, and by facilitating interpersonal understanding, all of which raise trust.

• Item Type: MPRA Paper
• Language: English
• Keywords: trust, growth, inequality, rule of law, property rights, development
• Subjects: O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; P - Economic Systems > P4 - Other Economic Systems > P48 - Political Economy; Legal Institutions; Property Rights

References

Archondo-Callao, Rodrigo, Road Works Costs Per Kilometer, World Bank Working paper, 2000.

Azariadis, Costas, Intertemporal Macroeconomics, Blackwell, 1993.

Bueno de Mesquita, Bruce, Morrow, James Siverson, Randall and Smith, Alastair, Bad Policy or Good?: Political Institutions and Policy Incentives, Working Paper, The Hoover Institution, Stanford University, 1999.

Burkhart, Ross, and Lewis-Beck, Michael, Comparative Democracy: The Economic Development Thesis, American Political Science Review 88:903-910, 1994.

Feng, Yi, and Zak, Paul J., The Determinants of Democratic Transitions, Journal of Conflict Resolution 43(2):162-177, 1999.

Feng, Yi, Kugler, Jacek, and & Zak, Paul J., The Politics of Fertility and Economic Development.

Ghate, Chetan, and Zak, Paul J., Growth of Government and the Politics of Fiscal Policy, Structural Change and Economic Dynamics, forthcoming.

Hanushek, Eric A., and Kimko, Dennis D., Schooling, Labor-Force Quality, and the Growth of Nations, American Economic Review 90(5):1184-1208, 2000.

Keefer, Philip, and Knack, Stephen, Polarization, Property Rights, and the Links Between Inequality and Growth, IRIS Center Working Paper No. 153, University of Maryland, 1995.

Knack, Stephen, Social Capital and the Quality of Government: Evidence From the States, World Bank Policy Research Working Paper 2504, 2000.

Knack, Stephen and Keefer, Philip, Does Social Capital Have an Economic Payoff ? A Cross-Country Investigation, Quarterly Journal of Economics, 112(4):1252-88, 1997.

Le, Quan Vu, Socio-Political Instability: Issues, Measures, and Explanations, Working Paper, Claremont Graduate University, 1998.

Mauro, Paolo, Corruption and Growth, Quarterly Journal of Economics, 110:681-712, 1995.

Putnam, Robert; with Robert Leonardi and Rafaella Y. Nanetti, Making Democracy Work. Princeton: Princeton University Press, 1993.

Putnam, Robert D., Bowling Alone : The Collapse and Revival of American Community, Simon & Schuster, 2000.

Rice, Tom W. and Jan L. Feldman, Civic Culture and Democracy From Europe to America, Journal of Politics 59(4):1143-72, 1997.

Smith, Vernon. The Two Faces of Adam Smith, Southern Economic Journal, 65(1):1-29, 1998.

Sullivan, Michael J., Measuring Global Values, New York: Greenwood Press, 1991.

Weingast Barry, The Political Foundations of Democracy and the Rule of Law, American Political Science Review, 91(2): 245-263, 1997.

Zak, Paul J., and Knack, Stephen, Trust and Growth, Economic Journal 111:295-321, 2001.

Zak, Paul J., and Fakhar, Ahlam, The Bioeconomics of Trust, Claremont Graduate University Working Paper, 2001.