Emerging Trends in The Social and Behavioral Sciences · Trust and Economic Organization

Trust and Economic Organization

Item

Title: Trust and Economic Organization
Author: Cook, Karen S.; State, Bogdan
Research Area: Class, Status and Power
Topic: Trust
Abstract: During the past four decades, the role of trust in the economy has gained increasing attention beginning with economist Kenneth Arrow's contention that trust is the lubricant of the economy increasing efficiency and saving on transactions costs. It is also important in the political realm, facilitating collective action. Robert Putnam, among others, contends that trust, as one component of social capital, is a key factor in the vibrancy of civil society. Both economists and social psychologists have used game theory and experimental methods to investigate trust and reciprocity. A key question remains How is trust maintained in the absence of monitoring, especially in the case of principal–agent relations? Economic historians and anthropologists have identified several mechanisms that serve to facilitate trust‐based interactions across space and time. In the context of organizations and management, a wide range of trust‐related issues have been explored, especially in the wake of Enron (a company no longer in existence) and the more recent failure of investment banks and other large financial institutions. At the macro‐level, Francis Fukuyama, among others, has explored the cultural underpinnings of differences in levels of general trust in various societies and its consequences for economic development. More recently, trust has become a central theme in the study of the sharing economy in which an astonishing array of goods and services is now offered by auction or exchange on the Internet. Detailed research on such enterprises (e.g., eBay, CouchSurfing, and AirBnB) is now possible through the development of computational social science.
Related Essays: Global Economic Networks (Sociology), Nina Bandelj et al.; The Public Nature of Private Property (Sociology), Debbie Becher; Returns to Education in Different Labor Market Contexts (Sociology), Klaus Schöemann and Rolf Becker; Neoliberalism (Sociology), Miguel Angel Centeno and Joseph N. Cohen; Elites (Sociology), Johan S. G. Chu and Mark S. Mizruchi; Stability and Change in Corporate Governance (Sociology), Gerald F. Davis and Johan S. G. Chu; Financialization of the US Economy (Sociology), Gerald (Jerry) F. Davis and Suntae Kim; Institutions and the Economy (Sociology), Carl Gershenson and Frank Dobbin; Global Income Inequality (Sociology), Glenn Firebaugh; Architecture of Markets (Sociology), Neil Fligstein and Ryan Calder; Labor Market Instability, Labor Market Entry and Early Career Development (Sociology), Michael Gebel; Behavioral Economics (Sociology), Guy Hochman and Dan Ariely; Family Formation in Times of Labor Market Insecurities (Sociology), Johannes Huinink; Innovation (Economics), Adam B. Jaffe; Search and Learning in Markets (Economics), Philipp Kircher; Transformation of the Employment Relationship (Sociology), Arne L. Kalleberg and Peter V. Marsden; Economics and Culture (Economics), Gérard Roland; Sociology of Entrepreneurship (Sociology), Martin Ruef; Impact of Limited Education on Employment Prospects in Advanced Economies (Sociology), Heike Solga
Identifier: etrds0370
extracted text: Trust and Economic Organization
KAREN S. COOK and BOGDAN STATE

Abstract
During the past four decades, the role of trust in the economy has gained increasing attention beginning with economist Kenneth Arrow’s contention that trust is the
lubricant of the economy increasing efficiency and saving on transactions costs. It
is also important in the political realm, facilitating collective action. Robert Putnam,
among others, contends that trust, as one component of social capital, is a key factor
in the vibrancy of civil society. Both economists and social psychologists have used
game theory and experimental methods to investigate trust and reciprocity. A key
question remains How is trust maintained in the absence of monitoring, especially in
the case of principal–agent relations? Economic historians and anthropologists have
identified several mechanisms that serve to facilitate trust-based interactions across
space and time. In the context of organizations and management, a wide range of
trust-related issues have been explored, especially in the wake of Enron (a company
no longer in existence) and the more recent failure of investment banks and other
large financial institutions. At the macro-level, Francis Fukuyama, among others, has
explored the cultural underpinnings of differences in levels of general trust in various societies and its consequences for economic development. More recently, trust
has become a central theme in the study of the sharing economy in which an astonishing array of goods and services is now offered by auction or exchange on the Internet.
Detailed research on such enterprises (e.g., eBay, CouchSurfing, and AirBnB) is now
possible through the development of computational social science.

THE IMPORTANCE OF TRUST
The role of trust in the economy has received a great deal of attention during
the past four decades, originating in part from Arrow’s foundational observation in The Limits of Organization that trust is a “lubricant” of the economy
increasing efficiency and saving on transaction costs. Arrow notes that one
of the properties of societies that are less developed economically is the lack
of mutual trust, a theme later made central in the well-known book on trust
by Francis Fukuyama in which he pursued this line of reasoning in a comparative study of general social trust and its link to economic prosperity in
some of the largest countries in the world including, among others, China,
Russia, and the United States. Numerous studies have sought to investigate
Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

the specific nature of the role that trust plays in economic activity since the
early work of Arrow with an emphasis in the past decade on networks of
economic activity and the determinants of trust or confidence in the political
institutions that support economic transactions. Parallel research programs
have developed across the social sciences to examine dimensions of this topic
in a wide variety of settings from the interpersonal domain to the realm of
institutions and governments.
TRUST IN ECONOMIC EXCHANGE
To model the economic consequences of individual trust interactions, behavioral economists have produced a number of game-theoretic formalizations
of trust and a long list of experimental findings derived from studies using
“trust games” (for a review, see Ostrom and Walker, 2003). Social psychologists in sociology have approached the problem of trust from the perspective
of social exchange theory using a different set of experimental methods and
settings (Cook, 2005; Cook & Cooper, 2003; Molm & Cook, 1995). This work
has implications for the study of socially embedded transactions in exchange
networks and systems of generalized exchange, common in the “new” economy now being fueled by the Internet.
While the focus of some of this experimental work is dyadic exchange and
the networks that connect dyads, much economic activity involves problems
related to the role of third parties. Of particular interest is the widespread
“principal–agent problem.” In the relevant situations, the principal (in effect,
the trustor) delegates certain tasks involving representation in an exchange
transaction to an agent who acts on her behalf. The problem arises because
agents’ incentives may conflict with those of their principals. Although contracts often serve to mitigate the potential need for trust, issues of enforceability and comprehensiveness of the contract or negotiated agreement, as
well as difficulties in monitoring, limit the extent to which these mechanisms
enable principals to maintain control over their agents’ actions.
A number of solutions to this problem, some quite innovative, have been
documented in findings produced by economic historians and economic
anthropologists. Greif (1989), for example, in a well-known study of the
Maghribi traders in the eleventh century, illustrates how reputational
concerns supported by coalitions that provided relevant information and
informal monitoring served to align the incentives of international traders
and their representatives across time and space. In the context of relations
between Kenyan cattle owners and the seasonal herders on which they
depend for their livelihoods, Ensminger (2001) finds that fictive kinship
(treating employees as kin) provides another solution to this particular
problem of trust when monitoring is virtually impossible. In each case, the

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economic value of the activity was the driving force in the effort to resolve
the trust problem. This important work and a long tradition of similar
studies in the social sciences on a wider range of phenomena indicate that
norms and institutions are often key to understanding the nature of the
underlying trust issues and the limits of the various solutions to problems
of trust especially when the stakes are high (Cook, Hardin, & Levi, 2005).
TRUST IN ECONOMIC ORGANIZATIONS
The importance of trust for economic activity goes well beyond individual interactions. Trust within and between organizations has been given
increased scrutiny over the past few decades, in particular from management scholars. This growing interest in trust was partially motivated by
the shift in many sectors from relatively hierarchical to more horizontal
forms of economic organization (Tyler, 2003) and the corresponding rise
in networked organizations as well as the increase in economic activity
embedded in social networks (DiMaggio & Louch, 1998). Gulati (1995), for
example, found that as trust develops, partner firms are likely to shift from
carefully specified, equity-based alliances to nonequity alliances in which
the possibility of opportunism increases. These alliances are governed less
by detailed contracts and more by the expectation that one’s partner will act
in good faith. Such expectations are highly significant when the relationships
between partners extend to networks that extend beyond cultural as well as
organizational boundaries.
A great deal of attention has been paid to the role of trust in formal and
informal structures of organizations, as well as the implications of trust for
effective leadership, for project-based teams, and for organizational citizenship behaviors (Dirks & Ferrin, 2001). Burt and Knez (1996), for instance,
illustrate the role gossip plays in amplifying (although not determining) trust
and distrust between coworkers, an effect that is particularly strong in the latter case. Trust permeates not only the internal structures of companies and
their interfirm alliances but also their relationship with the external environment, both natural and cultural. La Porta, Lopez-de-Silanes, Shleifer, and
Vishny (1997), for instance, investigate the link between the level of generalized trust in a country and the performance of government as well as large
organizations. They find that low levels of trust are correlated with lower
performance and economic growth.
SOCIAL CAPITAL AND INFORMAL INSTITUTIONS
The role of trust in the normative context, which regulates social and economic activity, is also an important ongoing area of inquiry. One influential

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body of work focuses on the relationship between trust and the concept of
social capital roughly defined as the resources (not simply economic) an actor
can access and mobilize through their social connections. Social capital at
the individual level often has significant aggregate effects at more macro levels. As Robert Putnam argues, social capital is important at the community
and societal levels because it allows for a more vibrant associational life and
more importantly facilitates collective action. Kenneth Arrow argues that the
lack of mutual trust represents a loss not only economically but also in the
smooth running of the political system, which requires success in collective
undertakings.
Trust represents a fundamental mechanism through which social capital
comes into being. At the individual level, an actor’s success in the social
mobilization of resources is contingent on others’ trust in the actor, typically conceptualized as trustworthiness. Indeed, as Dasgupta (1989) argues,
trust may be considered a concrete resource on which an individual or organization may draw in their economic activity. It can facilitate job seeking
(Granovetter, 1973) and the acquisition of social support (Small, 2004), as
well as various forms of assistance in times of need. At the societal level,
the successful mobilization of resources through social ties represents one of
the essential ingredients for a functional economy. Sociologists and political
scientists often argue that it is the breakdown of social capital and the community it fosters that results in increases in violence and criminal activity
typically in urban areas (Hagan & McCarthy, 1997; Rose & Clear, 1998). Such
activity clearly has an effect on economic enterprises and productivity, more
broadly.
Particularly important in this context is the trust individuals have in
unknown (or little-known) others, a situation often typical of economic
activity. A number of surveys (e.g., the World Values Survey and the
European Social Survey) have revealed wide differences in the extent to
which individuals in different countries report trusting strangers, a metric
also known as general or “generalized” trust. Confirming the theoretical
assumptions of the social capital literature, macroeconomic studies have
established links between political developments, economic growth, and the
level of generalized trust in a country (Knack & Keefer, 1997), and have even
posited the existence of a “low-trust poverty trap” (Knack & Zak, 2003).
In addition to the secular trend of overall decline, the Great Recession
has taken its toll on current levels of institutional trust. In an analysis of
multiple survey measures of trust in economic and political institutions
in the United States and around the world, Stevenson and Wolfers (2011)
indicate that institutional trust has declined during the Great Recession
(2008–2009), manifesting an inversely proportional relationship to the
unemployment rate. As unemployment rises, institutional trust declines.

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Research also reveals significant differences in the extent to which different
sociodemographic groups trust others. In the United States, Alesina and La
Ferrara (2002), for instance, find that economically disadvantaged groups,
as well as racial minorities and women, are less likely to trust others, but
that neither religion or ethnicity affect trust. Bjørnskov (2008) synthesizes
a number of previous studies comparing levels of generalized trust across
the world. The emerging pattern of findings in this research shows the
Scandinavian countries as having the highest levels of trust in unknown
others, followed by the other Western European nations, especially those
in the north, with most developing countries having low- or middle-range
levels of generalized trust.
Although the findings concerning social capital and generalized trust have
been prolific, a few important questions remain largely unanswered. Much
research has been devoted to determining what kinds of persons trust others more or less, but far less work has addressed the mechanisms by which
the individual propensity to trust others either increases or decreases. Conversely, although the association between generalized trust and economic
and political outcomes has been repeatedly documented, the actual causal
mechanisms involved require further investigation. New methods of measuring generalized trust and research that documents changes in economic
organization over time in relation to key political factors are needed in the
future. Survey research has its limits with respect to answering the causal
questions that remain unanswered.
TRUST IN ECONOMIC SYSTEMS
Although prolific, trust research has suffered from a somewhat disjointed
character, undoubtedly partially due to the interdisciplinary nature of this
field of investigation and the lack of efforts to consolidate existing findings.
We believe bridging the gap between micro- and macro-level understandings
of trust to be one of the essential directions for research in the future. This task
is particularly important given the extent to which trust underpins many economic transactions, which the recent economic crisis has so clearly revealed.
Especially interesting are some of the formal models currently being developed in computer science and physics, which hold the promise of integrating
findings about individual behaviors with those concerning societal patterns
of trust.
Steven Marsh provided one of the first formal examinations of trust using
computational methods. He attempted to incorporate the disparate insights
of the trust research current at that time into a computational model. Other
efforts at modeling trust include the work of social scientists, Macy and
Skvoretz (1998), who used computer simulation to examine the emergence of

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trust in a variably embedded Prisoner’s Dilemma in networks of neighbors
versus strangers, and Abdul-Rahman and Hailes (2000), who proposed a
model of trust that incorporated the concepts of reputation and the spread of
word-of-mouth information. Spurred by the growing synergy between the
computationally intensive disciplines and the social sciences more broadly,
formal models of trust have proliferated in the past decade (see Artz & Gil,
2007; Marsh & Dibben, 2005; Sabater & Sierra, 2005; for reviews of the field).
Recent exponential growth in the trust literature, outside of the traditional
social sciences, in computer science, physics, and systems engineering highlights the complexity of the trust as well as its importance in society. Formalizing models of trust represents a necessary next step in filling the large gap
between micro- and macro-level examinations of the factors that affect economic organization and the activities involved. A number of recent endeavors in the fields of computational social science and complexity theory may
foster new insights into the role of trust in society and specifically the global,
networked economy.
TRUST AND THE NEW ECONOMY
In addition to the urgency, induced by the Great Recession, of gaining a systemic understanding of the impact of trust on the economy, we also recognize
the opportunity presented by what is being called the Big Data revolution in
the social sciences and the proliferation of web-based peer-to-peer exchange
platforms and worlds of online interaction in which trust and reputation play
a primary role. Perhaps the most evident example of the central role trust that
has come to play in Internet ventures is the now well-established and widely
used commercial platform, eBay, which relies on trust between buyers and
sellers for the successful completion of transactions, with relatively minimal
institutional backing to help guard against opportunism.
However, the role of trust in Internet transactions extends well beyond
online auction markets. Collaborative efforts such as Wikipedia, for example,
and the open-source movement more generally rely on the trust members
have in one another’s competence and good intentions. In a study of the
Epinions product review website, Guha, Kumar, Raghavan, and Tomkins
(2004) showed that the trust scores Epinions users assigned to others’ reviews
could be predicted easily based on the nature of the preexisting structure of
the trust network. Likewise, Leskovec, Huttenlocher, and Kleinberg’s (2010)
more recent work documents the same pattern of predictability for promotion votes on Wikipedia, arguably a measure of interpersonal trust or confidence in the website.
The past decade has witnessed the emergence of a fairly large number of
websites that facilitate the peer-to-peer exchange of highly personalized

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goods and services, and this segment of the Internet market is growing
exponentially. The Internet now allows strangers to exchange hospitality
(through CouchSurfing, AirBnB), to share their cars (through ZimRide,
RelayRides, SideCar, or digihitch), and even to invest in one another’s business ideas (through Kickstarter and Peerbackers) and nonprofit ventures
(e.g., Crowdrise). The Internet has clearly facilitated the rapid rise of this new
“sharing economy,” in which trust occupies a key role. As one of the oldest,
and best known, organizations in the sharing economy, CouchSurfing.org,
a nonmonetary hospitality exchange service, has received the attention of
a number of researchers. Lauterbach, Truong, Shah, and Adamic (2009)
provide evidence that CouchSurfing supports the existence of a large system
of generalized exchange through their website, with only about 12% of
hosting events being directly reciprocated in dyadic exchanges in which
surfers actually stay at the home of those they host. This segment of the
economy is growing so quickly that companies have built-in social science
research teams outside of academia to more fully understand the nature of
the market for such services worldwide and to market the information they
obtain in the process of facilitating generalized peer-to-peer exchange.
CONCLUSION
In a world in which economic activities are increasingly embedded in social
networks that extend around the globe trust in persons as well as institutions matters. Trust in those we purchase blindly from and confidence in the
systems that support the peer-to-peer exchange of both goods and services
warrant concern and attention not only by those engaged in the economic
activity but also by social scientists who can investigate the opportunities
and the pitfalls emerging in this “new economy.” Increasingly, the boundary
between social and economic exchange is being blurred and the organizations and institutions that originally supported arms-length transactions are
being circumvented by those that do not—by those that offer direct supplier
to consumer (or seller to buyer) connections in almost every realm of valued
products and activity.
In our view, this trend will entail closer examination by sociologists,
psychologists, and anthropologists as well as economists and political
scientists and require more funding to create the types of investigator teams
more common in the natural sciences than the social sciences. The extent of
these newer forms of economic activity and their reach into the personal,
interpersonal, organizational, and institutional arenas is quite far and deep.
Thus beyond the traditional study of trust in these domains, understanding
the linkages between them is going to become even more important to fully
comprehend the interdependencies involved. In addition, with an increasing

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

array of start-ups, Initial Public Offering (IPO)s, transnational organizations,
global nonprofits, and Internet-based enterprises, the study of economic
activity of all types and the nature of the organization of this activity will
require more complex theories and methods of analysis, including those
being developed now in computational social science and complexity
theory. The fact that trust (in both persons and institutions) has become a
central topic of interest across the social sciences in the past few decades is
testimony to the rise of the networked economy and the interdependencies
it entails that characterize transactions of all kinds and the social systems in
which they are embedded. Understanding this enterprise should provide
the impetus for interdisciplinary work on economic organization at a scale
not yet imagined.

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FURTHER READING
Zak, P. J., & Knack, S. (2001). Trust and growth. The Economic Journal, 111(470),
295–321.

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KAREN S. COOK SHORT BIOGRAPHY
Karen S. Cook (kcook@stanford.edu) is the Ray Lyman Wilbur Professor
of Sociology and a Director of the Institute for Research in the Social Sciences (IRiSS) at Stanford. She conducts research on social exchange, social
networks, and trust. She has edited a number of books in the Russell Sage
Foundation Trust Series, including Trust in Society (2001), Trust and Distrust
in Organizations: Emerging Perspectives (with R. Kramer, 2004), eTrust: Forming
Relations in the Online World (with C. Snijders, V. Buskens, and Coye Cheshire,
2009), and Whom Can Your Trust? (with M. Levi and R. Hardin, 2009). She is
a coauthor of Cooperation without Trust? (with R. Hardin and M. Levi, 2005).
In 1996, she was elected to the American Academy of Arts and Sciences and
in 2007 to the National Academy of Sciences. In 2004, she received the ASA
Social Psychology Section Cooley Mead Award for Career Contributions to
Social Psychology.
She is a trustee of the Russell Sage Foundation and a Coeditor of the Annual
Review of Sociology.
BOGDAN STATE SHORT BIOGARPHY
Bogdan State (bstate@stanford.edu) is a PhD candidate in the Department
of Sociology at Stanford University. He is the graduate assistant for the Trust
Project at the Institute for Research in the Social Sciences (IRiSS) at Stanford. In this capacity, he has conducted research on trust in various offline
and online settings, the latter including CouchSurfing.org. He has published
several papers including From Power to Status in Online Social Exchange (WebSci’12, Evanston, IL) and Studying Inter-National Migrations through IP Geolocation (WSDM’13, Rome, Italy). He has received the Best Extended Abstract
Award at the 2012 ACM Web Science conference. State’s doctoral studies are
supported by the Joan Butler Ford Stanford Graduate Fellowship.
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Suntae Kim

Trust and Economic Organization

11

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