Trust in economic institutions
they can be based on social interactions, such as parents of children or neighbors
participating in activities that benefit others. For example, embedded social relation-
ships and the social capital that they provide enable parents to trust other parents to
monitor their children, or neighbors to trust others to watch out for their property.
However, there are many other institutions that are relied on for different actions.
Formal law, organizational rules, and norms impose sanctions on those who break
the rules through various enforcement mechanisms. These institutions are crucial
when interacting with a trustee who is not part of one's social network. They allow
the trustor to assess a baseline for the amount of risk she is exposing herself to
in a specific interaction. In this section, we will discuss some of these institutions
(Fig. 3.1 ).
Carruthers [ 4 ] discusses the role various institutions play in determining how
much one person trusts another in credit transactions. In these transactions, the seller
extends credit to a buyer who receives goods and in return provides a promise to pay
at a future date. The seller has to trust that the buyer is going to fulfill her promise,
the receipt of the payment. However, there is uncertainty about whether the trustee
will in fact honor the debt. As a result, the trustor is vulnerable to losing money if the
trust is misplaced. Carruthers illustrates the function of various financial institutions
by discussing the historical development of credit in the U.S. in which different
institutions emerged to reduce the uncertainty and vulnerability faced by lenders
and to enhance their willingness to trust the debtors.
Some of these institutions are informational: they provide information about the
debtor that is not easy to obtain without social relationships, and may even be hard
to get through social channels. For example, the character and reputation of the
debtor and the purpose for the loan are the types of information that one tends to
obtain through social channels. These channels may lead to biased evaluations of the
trustees due to the lack of ability to compare with others or reliance on subjective