73rd International Atlantic Economic Conference

March 28 - 31, 2012 | Istanbul, Turkey

Trust, cooperation, and time horizon in Central and East European countries

Saturday, 31 March 2012: 2:35 PM
Ivan I. Major, Ph.D. , Economics, Budapest University of Technology and Economics, Budapest, Hungary

Autonomous economic actors of a market economy make a large number of decisions every day in the belief that they can rely on the usual procedures, signals and habits of other participants. In other words, they need to trust other players in the market to some extent, and they need to have some confidence in the legal and cultural institutions of the state to be able to run their operations. In the first part of my paper I compare and contrast the indicators of trust and cooperation of a selected group of advanced countries and those of transition countries of Central and Eastern Europe by using the data of the World Value Survey and the European Value Study. I demonstrate that the low level of trust and the economic actors’ unwillingness to cooperate with each other and with their country’s institutions results in a short time horizon of economic decisions. In addition, I analyze the relationship between trust and cooperation on the one hand and macroeconomic performance on the other. I show that the indicators of trust and cooperation have a statistically significant impact on economic growth in CEE countries, while such a relationship does not exist in advanced economies.

The second part of the paper develops a model of double information asymmetry between governments and economic agents to show that the lower the level of trust in a society the more distorted economic behavior becomes and the larger the efficiency loss of business activities will be.

JEL classification numbers: D63, D82, P26

Key words: Trust and economic performance, asymmetric information and mechanism design, political economy of economic transition