Trust, Cooperation and Time Horizon in Economic Decisions

Abstract

My paper addresses an issue that is rarely discussed in the economics literature: how does the economic actors’ trust in each other and in the legal and political institutions affect a country’s economic performance? The first part of the paper is an empirical analysis of the interrelationship between confidence in institutions in different countries, the economic actors’ willingness to cooperate with each other and with state institutions, and their decisions’ time horizon on the one hand, and the countries’ economic performance on the other. I compare the relevant indicators of Central and East European countries (CEE countries), the advanced Western countries and some Asian countries. I show that the low level of trust, the lack of cooperation among the economic actors and with their state institutions, and the short-term time horizon of economic decisions in CEE countries are at the root of how these countries can cope with the current financial and economic crisis.

The second part of the paper applies the theoretical models of mechanism design to the issues discussed in the first part. I demonstrate that government policy results in “perverse incentives” toward the economic actors if they do not have confidence in their economic institutions.