![]() ![]() There are really two reasons for why it may be rational for you (the buyer) to trust me (a seller). To explore how markets function when transactions require trust, it’s useful to start by asking yourself when and why it’s rational for market participants to trust each other - that is, to believe that the other side is going to follow through with their promise, even if it’s not in their immediate economic interest to do so. What the economic literature on trust tries to understand is how markets function when transactions do indeed require trust.īUMPER: Rationality and Trust: "Good Types" In many situations, you can’t verify on the spot whether I’m selling you a lemon or not, and writing a contract is either costly or even impossible.Īnd in such situations, transactions do require trust. ![]() The problem is that in many situations, that’s not the case. ![]() Or, alternatively, if we can write a contract that ensures I’m not selling you a lemon, then, again, we don’t need any trust between us to transact. If, for instance, you can verify on the spot whether I’m selling you a lemon or not, then our transaction doesn’t require any trust. To be sure, not all transactions require trust. It’s an impediment to growth in employment, wages and profits, and therefore makes us all worse off. Or the other way around - trust matters because the absence of trust is an impediment to growth. And you won’t buy from me even if, in principle, I could make a product that you value more than it costs me.Īnd so, trust matters to economists because it enables and facilitates transactions that create value and therefore are good for all of us. To take the quintessential economic transaction as an example - if you (the buyer) don’t trust me (the seller) not to sell you a lemon, then you won’t buy from me in the first place. And they care a great deal about trust because, in the absence of trust, many value-creating transactions simply wouldn’t take place. Niko Matouschek Economics Economic Exchange,Economics,Legal Guarantees,Long Term Focus,Mergers and Acquisitions,Regulation,Reputation Management,Social Psychology Trust is an issue that most people don’t associate with economics, yet economists actually care a great deal about trust. ![]()
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