- University of Wisconsin-Milwaukee
Wednesday, June 22, 2016
Polo Santa Marta, Via Cantarane 24, Stanza 1.59
In this study, we introduce an experimental approach to study the causal impact of trust on economic performance. We design a decentralized laboratory economy that has the structure of an optimal growth model in which output is allocated between consumption and investment over a sequence of periods. A threshold externality in which a “big push”―agents coordinate their investment decisions to push the aggregate capital stock above the threshold―is required for the economy to utilize a more efficient technology. There exist two Pareto rankable equilibria where the Pareto-inferior equilibrium is considered as a poverty trap. Groups with various trust levels are formed before they participate in our dynamic, decentralized market economy. We find that high-trust economies tend to accumulate more capital and produce more output than their low-trust counterparts. As a result, they are also more likely to surpass the threshold and escape the poverty trap. That being said, we also find that trust has much weaker effects on the initially poorer economies. The heterogeneous impact of trust suggests that formal institutions and policies would be needed to further promote economic success in least developed economies.