Trust and its Implications for Economic Activity, Welfare and Globalisation

Abstract

Taking account of economic theories and models, this article discusses the influence of trust on the level of economic activity and welfare, and its importance for the process of economic globalisation. After providing some background on the concepts of trust and trustworthiness, it examines trust as a valuable element in contracting and as a consideration in principal-agent relationships and in the sale of goods. The theory of games is used to highlight the significance of trust for collective outcomes that involve interdependence between entities. This provides a useful introduction to business cooperation and trust because business cooperation involves varied types of economic interdependence between firms. These are captured or highlighted by the theory of games in a general manner. The role of trust in advancing the process of economic globalisation is given particular attention. Specific consideration is given to its role in facilitating international contracts, its influence on international principal-agent issues, its implications for the international sale of goods and in addition, its consequences for business cooperation and for alliances, the latter may be adopted as a means to meet the challenges of economic globalisation. While economists have given attention to the economic importance of trust, the results presented in this article indicate that its economic importance has been underestimated, and particularly so in relation to the process of economic globalisation.