Trust and Efficiency

Posted: 28 Nov 2001

See all articles by Ralph Chami

Ralph Chami

International Monetary Fund (IMF)

Connel Fullenkamp

Duke University - Department of Economics

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Abstract

This paper uses the economics of altruism to show how the presence or absence of trust between employees of the firm affects economic efficiency. We develop a simple model in which trust is defined as reciprocal altruism between two employees and show that the presence of trust improves efficiency by mitigating principal-agent problems. Firms characterized by trust between employees are more profitable and have higher levels of employee satisfaction than firms from which trust is absent. We also compare the effects of trust to those of profit-sharing plans and argue that cultivating trust in the firm is easier to implement.

Keywords: Trust, Altruism, Efficiency, Principal-Agent, Moral Hazard, Asymmetric Information

JEL Classification: G3, D64, D63, D8

Suggested Citation

Chami, Ralph and Fullenkamp, Connel, Trust and Efficiency. Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=292187

Ralph Chami (Contact Author)

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Connel Fullenkamp

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