Trust as Individual Choice with Social Values, or Trust in the World

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Trust as Individual Choice with Social Values,
or Trust in the World

• Thomas B. Singh
• Feb. 5, 2008
• Research Seminar
• Dept. of Economics
• University of Kent

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Introduction

• Why is Trust studied, and How?
• Choice with Social Values - Social Interactions
  (SI)
• Individuals in a group tend to behave similarly
  (Smoking, Crime, Educational Outcomes, etc.)
• Individuals are more or less trusting as society
  is more or less trusting
• Contribution
• The Economics of Trust SI Framework
• The importance of Trust Norms
• Informal Institutions

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Informal Institutions

• Reference Group Country
• Expectations Interactions at country level
• How do informationally isolated agents
  learn/form beliefs about the trust decisions of
  others? How are beliefs transmitted/diffused?
• Population Behaviour Trust in the World
• Beliefs about the trust stance others must
• be mutually consistent within countries and in
  the world
• explain/predict multiple (polarised stable
  mean unstable) equilibria
• SI Analytical NIE

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Informal Institutions

• Observation suggests that
• the propensity of an individual to behave in
  some way varies with the prevalence of that
  behaviour in some reference group containing the
  individual (Manksi 1993)
• But
• Can a researcher observing the distribution of
  behaviour in a population infer whether the
  average behaviour in some group influences the
  behaviour of the individuals that comprise the
  group? (Manski 1993)
• To the extent that we can infer that Trust Norms
  exert a statistically significant influence on
  Trust Decisions, there is empirical evidence of
  the importance of informal institutions.

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Baseline Model of SI

• The model assumes that
• where and
• y is the outcome variable
• x is a vector of group characteristics
• z, u are vectors of observable and unobservable
  individual characteristics
• Only Endogenous Effects produce a Social
  Multiplier

Social Interactions Effects
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Baseline Model of SI

• Regression of y on x and z yields
• ß ? 0 gt endogenous effects due to average group
  behaviour
• ? ? 0 gt exogenous effects due to average group
  characteristics
• d ? 0 gt correlated effects due to unobservable
  indiv. characteristics

(1)
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Equilibrium Identification

• Separating (ß, ?) from d ? and ß from ?
• Reflection problem due to E(yx) in (1)
• Group or social equilibrium is unique
• Only composite parameter identification

(2)
(3)
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Identification Possibilities

• Self-selection and identification
• Identification in a binary choice Manski model
• Random Assignment
• Brock Durlauf (2001) Random Utility Model with
  Social Interactions (RUM-SI)
• Mitigates the identification problem
• Accommodates multiple equilibria

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RUM-SI

• Individuals i 1, 2,, I get utility V(?i) from
  their trust decisions ?i -1, 1, those of
  all others ?-i, and a random utility term
• 
  
• u(.) and S(.) - private and social utility, resp.
• captures the social
  interactions
• are is expectations of others
  trust decisions

(4)
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Strategic Complementarities

• Assume that ,
• is subjective belief about the average choice of
  others
• So
• Strategic Complementarities in trust decision
• Marginal returns to agent i of (say) trusting
  increase as others are also believed to be
  trusting

(5)
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A Stylised Trust Game

• NE Distrust, Distrust
• -1
• Suppose 1 emerges
• V(?i 1) now increases

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Repeated Trust Games

• Trusting becomes a regularity of behaviour due
  to
• Instrumental/informational conformity,
  focal-ness, etc.
• How does become a shared belief/common
  knowledge among informationally isolated agents
• How is this shared belief sustained?
• Off the path of play self-enforcing beliefs
• Deviation by i will induce country collapse in
  trust

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Shared Beliefs Informal Institutions

• Institutions are systems of social variables
  which conjointly generate a regularity of
  behaviour (Greif 2004)
• Shared values are embedded in the regularity of
  behaviour cf. Granovetters embeddedness

Regularity of Behaviour
Behaviour
Social Variables/Shared Values/Expectations
Behavioural Internalised Beliefs
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Social Individual Utility

• Endogenous SI Effects Strategic
  Complementarities among isolated agents
• Facilitated by informal institutions
• Specific form of S(.) satisfying (5)
• (4) becomes
• Estimation the random utility term

(6)
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Trust as Individual Choice

• Assume that
• e(-1) - e(1) is logistically distributed
• The trust decision is made rationally

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Trust Decision Probabilities

• To motivate the empirical model
• Linearise u(?i) as h(?i) k
• u(1) h k and u(-1) -h k
• Assume that individuals have different private
  utilities depending on some Xi and Yn(i)
• Xi Observed individual-specific variables
• Yi Observed group-specific variables influencing
  each group member

(7)
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Trust Decision Probabilities

• Thus hi b c'Xi d'Yn(i)
• And the individual trust decision probabilities
  will become
• given that u(?i) h(?i) k and
• assuming that ß 1
• Parameters b, c, d, J

(8)
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Model Closure

• Any set of observed choices can be reconciled
  with the parameters
• appropriate choice of subjective beliefs mie
• Beliefs should not only be shared, but mutually
  consistent
• In each country trust beliefs must be mutually
  consistent
• How is this possible?

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Informal Institutions

• Institution self-sustaining system of shared
  beliefs about a salient way the game is played
  repeatedly (Aoki, 2001)
• Salience
• Boundedly rational players only observe the
  regularity of behaviour
• contains compressed information about the
  equilibrium of the game
• Self-Consistency
• Players hold beliefs consistent with that
  equilibrium
• Not just shared beliefs/common knowledge

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Model Closure Social Equilibrium

• Combining Salience and Self-Consistency and
  Rational Expectations, the Social Equilibrium is
• where m is the expected average choice level
• Multiple Equilibria can be accommodated
• To be expected given strategic complementarities
• We assume that this condition holds in the
  empirical strategy

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The Empirical Strategy

• We have an expression for Pr(?ij Xij, Yij, mej)
• mej is not observable
• Our interest is in Pr(? X, Y, m) gt MLE
• Model Closure Self-Consistency, Salience, RE

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The Maximum Likelihood Estimator

• The Log Likelihood Function is
• ML gives us the parameter vector that finds for
  each obs. a Pr(?ij Xij, Yij, mj) that
  maximises
• Pr(? X, Y, m)

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Summary of Data
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Correlations
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Standard errors are given in parentheses. ()
indicates significance at the 5 (10) level.
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Concluding Comments

• The intial results show that
• Only Manski 3 RUM-SI have identical signs
• Formal Institutions are insignificant in RUM-SI
  what matters is Confidence in Institutions
• Endogenous Effects are significant
• Trust in the World
• High Trust Economies (Stable)
• Medium Trust Economies (Unstable)
• Low Trust Economies (Stable)

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Appendix Social Equilibrium

• From (7) the expected value of agent is trust
  decision is
• Where mei is is subjective belief about others
  trust decisions.

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• By the assumption of common knowledge, all
  individuals hold the same subjective beliefs me
• By Self-consistency and Rational Expectations me
  E(?i) E(?j)
• By Salience E(?i) E(?j) m
• Hence the Social Equilibrium Condition