A Theory of Trust Based Systems of Intermediation

Recent studies have analysed the economic benefits of belonging to high-trust networks and the biological foundations of individual trust, but much scepticism remains regarding the precise role of trust in economic transactions, as well as gaps between micro and macro concepts of trust. This paper links individual and institutional trust by modelling the costs associated with accessing market, law and trust-based intermediation systems, and identifies the conditions under which one of the three systems may be more advantageous for rational actors, and thus more likely to emerge. The discussion concentrates on examples drawn from development policy to illustrate how the three systems operate together, and how the failing of the trust system affects the legal and market systems