Getting and Staying Out of a Low Trust Trap: The Relative Roles of Tipping and Institutional Reform

Abstract

Given that there are significant endogenous effects in trust that cause people to follow trust norms when deciding whether to trust others, trust can be modelled as a supermodular game or a game with strategic complementarities. As such, even though the strategy choices are binary and discrete, the game is amenable to monotone comparative static analysis in which institutional reform can be represented as an increase in a parameter in the game of trust. The analysis pessimistically implies that formal institutional reform has only a limited role to play in increasing the level of trust because low trust is in fact an equilibrium or a „low trust trap.‟ What is first required is a tipping mechanism, which involves only a relatively small number of influential agents adopting the strategy of trusting others even in a low trust environment. Formal institutions, appropriately reformed, will then be required to ensure that shocks to trust, even if they did occur, would not accumulate and tip society back into low trust.