Trust and Economic Behavior in a Low-trust Society

Abstract: Trust is an important dimension of economic behavior the absence of which is anathema to economic activity. China is widely characterized as a low-trust society; yet it has successfully developed most of the elements of a modern market economy. However, its legal system is still weak and vague with respect to key concerns regarding property rights and principal-agent relations. Property rights over land and intellectual property is vague and uncertain. Rent-seeking by government officials and bureaucrats at the local level especially is still an incorrigible problem, contributing to uncertainty. Although China has invested efforts to bring national legislation in line with international standards, law enforcement remains a critical concern. Litigation in disputes over contracts is cumbersome and often unreliable. Even if a favorable decision is taken, court rulings are often not enforced. To approach the question where thin trust comes from if reliable formal institutions are absent, we apply a multi-method approach combining a standard experimental design with survey evidence generated in China’s Yangzi delta region, a region famous for its thriving entrepreneurship. To elicit behavioral attitudes towards “trust in strangers” the authors invited 700 entrepreneurs to participate in a trust-game. Our results suggest that trusting behavior is neither an innate trait, nor does thin trust stem from good experience with local institutions. Instead thin trust is gained from personal experience. Economic actors who can draw on positive experiences within their closest network of family, friends, and relatives (such as financial support at the founding stage of the firm) are more likely to also develop trusting behavior outside of their own network. In other words if people you know deal with you well and trust you, you are likely to generalize from this experience to trust even people you don't know.