TRUST, MARKETS AND EFFORT.

Recent empirical work indicates a strong and positive association between trust and economic growth, but the question of how trust can increase economic efficiency and prosperity remains disputed. This paper presents two arguments that explain the influence of trust on economic performance. Firstly, it is shown that trust contributes to interorganisational efficiency by enabling economic actors to move out of committed relationships and invest their resources in more uncertain, but at the same time more profitable, projects. Secondly, it is shown that trust contributes to interorganisational efficiency by contributing to higher effort, increased productivity and less monitoring in situations where effort cannot be fully specified contractually. Both mechanisms are relevant to understand why high-trust societies manage to run more prosperous economies. [ABSTRACT FROM AUTHOR]