Do Markets Increase Trust?

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THE STASH AUGUST 27, 2009

Do Markets Increase Trust?

What's the relationship between markets and morality? The standard assumption is that markets have little impact on the moral character of people who operate within them. But it doesn't look like that's necessarily the case. Patrick Francois and Tanguy van Ypersele studied what happened to people's level of "trust in others" in states that deregulated their financial sectors in ways that increased competition. Trust can be considered a moral attribute, and given what's happened in the subprime market, you'd think that deregulation might lead to a drop in trust. But the researchers found quite the opposite effect.

This chart shows the correlation between new company formation (a proxy for competition) and trust levels before and after deregulation:

The clear trend is that the rise in trust coincides with the rise in competition.

The researchers also found that workers employed in more competitive industries report having higher levels of trust in others, regardless of these workers' education, race, age, gender, city size, income, and a whole host of other things that might explain the pattern.

Why would working in a competitive sector make people more trusting? We think it is because competition disciplines people to act in the group’s interest. Each one of the many workplaces in the labour market constitutes a collection of workers tied together via the performance and continued existence of their firm. Shirking, or free-riding, is always good for the individual but bad for the group. Groups with more free-riders tend to under-perform, and when competition is intense, under-performance becomes very costly. This limits free-riding in competitive environments, and the more time one spends with people who don’t free-ride, the more one is likely to trust others.

According to the measure of competitiveness the researchers used for this portion of the paper (which is based on the percentage of sales captured by the biggest firms in an industry), the finance sector is one of the more uncompetitive industries out there. But given the catastrophe it helped bring about, that shouldn't be much of a surprise.

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posted in: the stash, economy, disaster, finance, patrick francois, tanguy van ypersele

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