Economics of Trust

"Trust is the basis of any relationship."
--Hardy Jenns (Some Kind of Wonderful)

In social situations, trust is the extent to which a person believes in the honesty, integrity, or reliability of someone else. Trusting relationships require little oversight to guard against agency or other problems. Trusting relationships are also durable, meaning less cost of search for alternative relationships.

From an economic standpoint, then, trust can be seen as quite valuable. It helps individuals get more for less, since fewer resources need to be spent on frictional costs associated with relationships.

On the other hand, trusting relationships tend to build commitment and specialization. Interdependence increases. This may not be problematic in stable contexts, but in turbulent contexts relationships built on trust may need to be revised or perhaps broken. Because of the lock-in associated with commitment, specialization, and interdependence, rearranging trusting relationships can be difficult. Switching costs are likely to be high.

It is also possible that relationships built on trust will persist longer than they otherwise should in uncertain environments. In fact, such relationships might escalate rather than diminish, as loss averse parties seek allocate more resources to maintain bonds that should be reversed.