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Introduction
In economics, exchange (e.g., Walrasian exchange) is often identified as a static thing through which assorted equilibria are technically feasible in a whole economy. The phenomena and problems inherent in this dynamic process, however, have not thus far been studied extensively, with the exception of the few economists that have examined the importance of the trustâexchange relationship (Williamson, 1993; Perelman, 1998). Based on this gap in the body of knowledge, this study presents trust and exchange systems in a unified framework (evolutionary economics) and then offers improvements and extensions.
Although exchange and trust have co-evolved historically, these twin concepts have been largely overlooked by economic studies, which have generally treated exchange (i) as a static process rather than an interactive dynamic one and (ii) as trust being implicitly rather than explicitly presupposed (i.e., barter, monetary, and Internet trust exchanges all belong to the same entity â exchange). If we consider the economics of trust to be a social action (Coleman, 1982) under uncertainty, then âthere is an element of trust in every transactionâ (Arrow, 1973, p. 24). Moreover, trust is placed in âtransitions between micro-level individual actions and macro-level states of the systemâ (Möllering, 2006, p. 15), suggesting trust phenomena (i.e., emergence, evolution, and stability) exist in interactive processes in exchange systems (Elsner and Schwardt, 2014), as this book further explores. More specifically, the motivation for this study is to describe the interactive dynamic characteristics of trust in exchange systems in general and to draw conclusions on the co-evolution of trust and exchange systems in particular in order to enrich recent studies in this body of research.
The importance of trust in exchange
The importance of trust in exchange has been emphasized in a number of economic studies (Table 1.1 lists the important works in this regard). The literature suggests that trust is the foundation of exchange in various ways. First, trust is related to transaction costs (e.g., Williamson, 1985; North, 1990). The emergence of trust helps reduce transaction costs among and between firms, collectives, and individuals, which serves as âan important lubricant of a social systemâ (Arrow, 1974, p. 23). Second, trust is intrinsically related to the principalâs problem (e.g., Ross, 1973; Shapiro, 1987) of not trusting his or her agents to handle certain issues capably. Third, trust is utilized to form an exchange relationship (e.g., Gulati, 1995; Das and Teng, 2001; Poppo and Zenger, 2002) that reinforces the cooperation between the parties. Finally, trust is described as taking part in expectation theory in the exchange (e.g., Simmel, 1990; Möllering, 2001; Elsner and Schwardt, 2014), which suggests that expectation is a source of trust. In summary, âthere is an element of trust in every transactionâ (Arrow, 1973, p. 24).
Table 1.1 Themes and sources of trust in economic exchange
| Themes | Sources |
|
| Trust and transaction cost theory (TCT) | North (1990), Williamson (1985), Cummings and Bromiley (1996), Bigley and Pearce (1998) |
| Trust and agency theory | Ross (1973), Shapiro (1987), Eisenhardt (1989), Möllering (2006) |
| Trust and exchange relationship | Granovetter (1985), Das and Teng (2001), Gulati (1995), Dyer (2000), Poppo and Zenger (2002) |
| Trust and expectation | Fox (1974), Luhman (1979), Lewis and Weigert (1985), Coleman (1990), Misztal (1996) Möllering (2006), Gambetta (1988), Simmel (1990), Elsner and Schwardt (2014) |
| Trust and exchange structure | Akerlof (1970), Siamwalla (1978), Popkin (1981), Kollock (1994) |
| Trust, reputation and reciprocity | Trivers (1971), Greif (1989), Lahno (1995), Hardin (2000), Milinski et al. (2002), Resnick and Zeckhauser (2002), Nowak and Sigmund (1998) |
| Trust and exchange arena size | Friedman (1979), Landa (1981, 1994), Berman (1983), Milgrom et al. (1990), Bernstein (1996), Stringham (2002), Leeson (2008), Elsner and Heinrich (2009), Elsner and Schwardt (2014) |
Indeed, the importance of trust is not limited to the domain of economics. Management (e.g., Macaulay, 1963; Emerson, 1978; La Porta et al., 1997; Bigley and Pearce, 1998; Levi, 1998), sociology (e.g., Blau, 1964; Deutsch, 1973; Dawes, 1980; Cook and Hardin, 2001; Nickel and Vaesen, 2012), and biology (e.g., Hirshleifer, 2001), from different perspectives, relatively or distinctly, explain its function and promote its development in the academic world. This interdisciplinary consensus on the importance of trust raises the question of what makes it so important. As a partial explanation, before elaborating on this answer explicitly herein, the paradoxes inherent in trust-building provoke deep and relevant questions.
The paradoxes of trust
In previous studies (see Table 1.1), trust is generally defined as a rational choice in the exchange process, together with decisions on whether trust ought to be placed at risk. According to Gambetta (1988), âWhen we say we trust someone or that someone is trustworthy, we implicitly mean that the probability that he will perform an action that is beneficial or at least not detrimental to us is high enough for us to consider engaging in some form of cooperation with himâ (p. 217). Further, as Coleman (1990) argued, trust is a rational choice in âsituations in which the risk one takes depends on the performance of another actorâ (p. 91; see also Hosmer, 1995; Lane, 1998; Whitener et al., 1998).
Despite the existence of rationality in this regard, people are constrained by different incentive structures in exchange such as in prisonerâs dilemma (PD) games. Furthermore, uncertainties in the exchange relationship also influence the extent to which parties can be trusted. One paradox of trust is thus the degree to which people can restrict their own self-interest (James, 2002). Put differently, what makes one person place trust in another when irregular behavior is likely to occur in a certain incentive structure?
Another paradox is that if trust is critical for exchange, why cannot trust simply be presumed (in other words, exchange is also important for trust)? There may be two reasons for this. On the one hand, trust may be an outcome of a dynamic exchange. For example, as Simmel (1990) stated, interactions form the starting point of all phenomena in society and, of these, exchange is a basic and important interactive process that influences trust-building. On the other hand, trust seems to be a result of static exchange (i.e., unrepeated exchange), because exchange itself may provide the âincentiveâ to trust. For example, if a person wants to buy a secondhand car, he or she should find out about any pre-existing mechanical problems. Alternatively, in international trade, as many studies have shown, although payment to a company abroad is typically made in advance, the goods cannot be exchanged simultaneously. This divergence may cause a lack of trust because finding faults with goods takes a long time, within which period cheaters may have already fled.
Existing explanations
Although people experience matters relevant to trust every day, it is still difficult to grasp the paradoxes of trust at the abstract level. The questions of how people can restrict self-interest in a certain incentive structure in order to trust and how exchange affects trust in either static or dynamic contexts are dependent on distinct perspectives and different theoretical approaches. One of the most common theories in this respect is rational choice theory (RCT). The rationality-based view (e.g., Deutsch, 1973; Coleman, 1982; Frank, 1987; Hollis, 1998; Dasgupta, 2000; James, 2002; Möllering, 2006) has demonstrated that trust is often riskily placed in interactions because of the existing incentives to assess the underlying losses and rewards rationally. As Gambetta (1988) defined, trust is considered to exist when âthe probability that the trustee will perform an action that is beneficial or at least not detrimental to us is high enough for us to consider engaging in some form of cooperation with himâ (p. 217). Or as Möllering (2001) argued, trust is âa state of favorable expectation regarding other individual actions and intentionsâ (p. 404). Although there exist conflicts in incentives for trust in these studies (i.e., expectation, reason, and calculation), trust is confined to rational models, which is an important step for perceiving one of the paradoxes of trust, namely how people can restrict self-interest in order to trust.
This perspective on exchange in the second paradox of trust stems from game-theoretical models, which are often used to describe exchange in everyday life (e.g., Deutsch, 1960; Hardin, 2006). Specifically, the emergence of better-off equilibria in models means the emergence of trust in particular, while worse-off equilibria often lead to distrust in general because of the conflicts inherent in exchange. In particular, from this perspective, trust is considered to be a static interaction of exchange or to exist in local interactions (e.g., studies of trust experiments), and is less related to dynamic or global interaction. This gap is bridged in this study because of the large interactive process of exchange in which trust phenomena develop.
Another important and oft-cited theory is the institution-based view (e.g., Schotter, 1981; Zucker, 1986; Knight, 1990; Powell and DiMaggio, 1991; Levi, 1998), which explains the paradoxes of trust based on two points: trust in institutions and institutional change. The first point refers to the fact that placing trust in a stable environment is isomorphized by institutions in which everyone carries out predictable and routinized actions. In other words, âtrust has to be achieved with a familiar worldâ (Luhmann, 1988, p. 95). Then, because institutional change reduces or increases reliable functioning, this degree of familiarity affects the dynamics of trust. Put another way, the dynamics of trust comply with institutional change. Hence, it serves to be an implication that the evolution of exchange systems describes different dynamic trust phenomena.
The third theoretical vantage point is the empiricism-based view (e.g., Miller, 1974; Knack and Keefer, 1997; La Porta et al., 1997; Stolle, 1998; Yamagishi et al., 1998; Knack and Zak, 2002; Uslaner, 2002; Dincer and Uslaner, 2010). Through theoretical models and hypothesis building, this perspective has shown that the paradoxes of trust are achieved by empirical outcomes in which the determinants of trust are found. These independent factors belong to extensive categories (e.g., life satisfaction, institutional efficiency, group size) in the broader sense, depending on those that place trust. Further, despite the importance of understanding causes for the emergence of trust, the dynamic process between independent and dependent issues is lacking, which prevents us from understanding how trust is influenced in dynamic exchange as well as from finding out interactive phenomena in a direct way.
Among these views on the paradoxes of trust, consensus exists that explanations are limited to the static context, failing to acknowledge the presence of an interactive process and overlooking the diffe...
