Institutions, Contracts and Organizations
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Institutions, Contracts and Organizations

Perspectives from New Institutional Economics

Edited by Claude Ménard

This outstanding book presents new original contributions from some of the world’s leading economists including Ronald Coase, Douglass C. North, Masahiko Aoki, Oliver E. Williamson and Harold Demsetz. It demonstrates the extent and depth of the New Institutional Economics research programme which is having a worldwide impact on the economics profession.
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Chapter 12: When good defenses make good neighbours: a transaction cost approach to trust, the absence of trust distrust

Margaret Levi

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12. When good defenses make good neighbors: a transaction cost approach to trust, the absence of trust and distrust Margaret Levi* INTRODUCTION How destructive is the absence of trust or even active distrust to the way economies, governments and organizations operate? Do we really need trust and social capital to improve exchange relationships or significant social and political interactions? A long list of distinguished economists, political economists and social theorists have answered the second question with a resounding, ‘Yes!’. But until we understand what damage distrust does and in what kinds of situations, it is preliminary to posit trust or social capital as the solutions. The first step, then, is the development of an empirical model of distrust and trust that specifies what is meant by these concepts, how to observe them and how to measure them. With such a model in hand, it might then be possible to clarify when distrust causes harm and when the creation of trust is the best means to alleviate that harm. The arguments of this chapter are simple. First, distrust may be the problem, but trust is not always the solution. Second, distrust may not always be a problem and may in fact be the source of the institutional arrangements that permit us to cooperate and exchange. This leads to the initial claim that the starting point of analysis should be distrust, or at least lack of trust, and not trust. The next step is exploration of the ways in...

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