See the Forest through the Trees: Social Trust and Human Capital

Abstract

This paper explores a new perspective in understanding social trust and its formation in a game theoretic setting. Evidence from experiments and real life suggests individuals differ in predisposition to cooperate, which is essentially a component of human capital that is costly to cultivate but yields a stream of returns in the future. When more people acquire a stronger cooperative tendency, they are in general more trustworthy and hence the social trust is higher. In this sense, the individual cooperative tendencies are the trees of the social trust forest. How many trees are planted and how tall they grow are affected by the effectiveness of education, information transmission, and economic governance institutions. Multiple equilibriums and inefficiency exist due to positive externalities. The main findings are consistent with relevant evidence.