2002 October 13 Sunday
Trust, the Internet. and Economic Growth

Glenn Reynolds has linked to a story in The Economist reporting on an IBM study on high and low trust societies and internet adoption:

The degree of trust in a society, as measured by the percentage of respondents who answered “yes” to the first part of the question above, explains almost two-thirds of national differences in the percentage of households that have Internet access. Even when controlled for other variables, such as the number of computers, trust remains an important factor.

I went digging back through the IBM site (with some help from Google) and found what appears to be the original paper, Authored by Claudia Keser, Jonathan Leland, and Jason Shachat of IBM Thomas J. Watson Research Center and Hai Huang of Duke University, it examines whether trust increases the speed of internet adoption and therefore whether the internet increases even further the opportunity costs of having a low cost society. The short answer is Yes:

Almost all transactions involve some opportunities for misrepresentation, non-compliance, or outright fraud. Detailed contracts, extensive monitoring of performance, and litigation are means of discouraging such behaviors, but they are all costly to implement. Mutual trust is an efficient substitute for these enforcement mechanisms, and empirically it appears to serve this purpose. Knack and Keefer (1997), for example, found that a very simple measure of how trusting inhabitants of different countries are is a significant explanatory variable in regressions of average annual growth rates in per capita income from 1980 to 1992. Moreover, the impact is large – a 10% increase in the measure of trust translates into a .8% increase in economic growth – a sizable increment given world average growth rates of 1% to 3% in the latter half of the 20th century.

Taken together these observations have a potentially troubling implication for low trust countries, the majority of which tend to be of low and middle income; namely, that in the coming years they will take a double-hit in terms of economic growth – penalized for low trust first in terms of higher transactions costs and then again through lower adoption of growth enhancing technology. Knack and Keefer’s (1998) findings suggest the first hit will surely come to pass. Whether the second does as well depends upon whether trust impacts Internet adoption. Our first objective in this paper is to test whether the proposition that trust is an important determinant of Internet adoption is, in fact, true. To presage our findings, it is.

The World Values Surveys that this paper refers to can be found here. If you just want to look at the cool summary graphs of the World Values Surveys then click here.

Share |      By Randall Parker at 2002 October 13 11:25 AM  Economics Political


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