37 – Trust, Reciprocity and Institutional Design

Trust and reciprocity are the bond of society (John Locke) and the lubricant of soci-economic systems Arrow). Economic agents are conceived as both self-interested and intrinsically untrustworthy. These assumptions impair severely economists’ accounts of social relationships.

The paper examines strategies to escape this paradox by enlarging our conception of rationality: the assumptions of self-interest and consequentialism are critically discussed as well as relational behavioral principles (e.g. trust and reciprocity).

The paper analyses the working of two different kinds of incentive mechanisms, namely intra-personal and inter-personal, and discusses experimental evidence that emphasize the empirical relevance of the latter.

Such mechanisms have important normative implications. In this respect some of the conditions that affect the process of accumulation and erosion of trust and social capital are explored. The tension between rules and trust turns out to be not inescapable, though it calls for a changing in the designing logic of institutions and contracts.

I shall discuss what are the changes needed in order to implement a trust-enhancing activity of institutional design.

JEL Classification: M52, C7, C91, D23.
Keywords: Incentives, reciprocity, trust, crowding-out, institutional design.