Trust and growth

Why does trust vary so substantially across countries? This paper presents a general equilibrium growth model in which heterogeneous agents transact a nd face a moral hazard problem. Agents may trust those with whom they trans act, but they also have the opportunity to invest resources in verifying th e truthfulness of claims made by transactors. We characterise the social, e conomic and institutional environments in which trust will be high, and sho w that low trust environments reduce the rate of investment. The prediction s of the model are examined empirically for a cross-section of countries an d have substantial support in the data.