Finding Trust in the Economy

Trust, like currency, can be debased. Knowing how to grow trust is the key to a thriving economy.
Appears in Spring 2017 Issue: Trust: Reweaving Our Social Fabric
March 1st, 2017

Market economies are plagued with reputations for being dog eat dog, for embodying survival of the fittest, for being—as one of my students once suggested on the first day of class—"dehumanizing." You might not expect to find a lot of trust in the realm of the economy, particularly one driven primarily by competitive pressures.

However, if we take a closer look at our economic interactions, we'll find trust hiding in plain sight. We engage in transactions that would be ridiculous if we did not place trust in the people and institutions managing them. We use signatures as our bond—one signature for a credit card transaction, about a hundred to buy a house (a house!), but the same fundamental trust underlies both. We purchase consumer goods assuming they aren't defective; we assume restaurant food is not poison. We put stamps on our letters and have a remarkable level of confidence that they will reach their destinations. Every day we pay sales taxes at the register and trust that the retailer will pass them along to the government, and at the end of the year we even—with remarkably high compliance in North America—pay our income taxes. The fact that it is considered an aberration when one of these things doesn't happen confirms that trust is the norm.

If we take a closer look at our economic interactions, we'll find trust hiding in plain sight.

In our changing markets, one might be concerned about our ability to maintain trust as we increasingly engage in transactions with strangers (online or even offshore) rather than friends and neighbours. Indeed, there are pockets of culture attempting to regain those community connections by pushing to buy locally produced foods and other goods. While there are many drivers of these movements, trust might be considered one of them; in what economists call a "repeated game" (and what everyone else calls return business) there is intrinsic pressure to maintain a healthy reputation if you want your local business to succeed. As such, customers expect their local sellers to be trustworthy, and they are usually right.

One might think that transactions with distant strangers would be very difficult in terms of trust, but—perhaps because this is such an obvious problem—a significant amount of energy has gone into solving it. Now you can ride in a car with a stranger who is not a taxi driver via Uber, stay in a stranger's home while they are away (or while they are there!) via Airbnb, and buy all kinds of things you never knew you always wanted on eBay. This is all made possible by a tiny but essential new market that scholars Jennifer Brown and John Morgan call the "market for feedback," whose sole purpose is the "manufacture" of reputation. Using technological platforms that are relatively transparent (for example, you can see your own public review of a service after submission), reputation becomes an observable characteristic of a seller. By formalizing reputation—and in some cases requiring feedback to be provided—we develop trust in a process that would otherwise be, well, just plain sketchy. Instead of having to trust the driver, host, or seller, we just have to trust all the people who have used their services before. Could that really be enough? The proof is in the pudding: the flourishing of these markets suggests that it is.

Solid, established levels of trust in a society are associated with a lot of positive economic outcomes far beyond keeping transactions smooth and efficient. Trust encourages economic development and improves economic growth. The economist Christian Bjornskov argues that trust has a causal role in establishing economies with strong property rights, low levels of bureaucratic corruption, and better governance. Bjornskov also explores the determinants of (and threats to) trust in a society. His cross-country work suggests that Protestantism and monarchy are good for trust, while social polarization is bad. Further work by other scholars underscores this primary threat: trust is lower in areas with substantial economic, racial, ethnic, or linguistic heterogeneity and among groups that have historically experienced discrimination.

Trust in sensitive transactions

Some economic interactions in society are particularly sensitive to trust. My work in policy analysis, with a specific interest in the disadvantaged, leads me again and again to these "messier" interactions. Two areas of particular interest to me are government expenditures on the poor (involving public trust) and the functioning of health-care markets (involving individual trust). Digging into each of these can help us see where trust at both the micro and macro levels plays into the success of social programs and private markets in serving those in need.

we don’t have a market for “ health”—although that’s probably what we’d like to buy—because it turns out that health is not for sale.

Economic models always suggest that it's better to give someone cash than an inkind benefit. The reasoning is simple: they could always buy the item you were going to provide, but they could also choose something else if that would make them better off. (Economists are not terribly good at handling the apostle Paul's lament in Romans 7:15, "For I do not understand my own actions. For I do not do what I want, but I do the very thing I hate." Perhaps this is one reason economic models can fail!). Economist Joel Waldfogel makes this point ably in his classic article

"The Deadweight Loss of Christmas," in which he extracts from his college students the estimated costs of gifts they received compared to how much they valued the gifts. He demonstrates that (1) more distant relatives are least capable of choosing highly valued gifts given their expenditure and (2) because they know this, they are more likely than others to give you cash. While the negative angle on Christmas gifts is indisputable evidence that we are indeed "the dismal science," this article clarifies an intuitive point: letting people choose how money intended for them is spent can lead to its being spent in ways they appreciate most.

Enter public food assistance. In the United States, the food stamp program (now called the Supplemental Nutrition Assistance Program, or SNAP) has been a staple of the social safety net. Even as cash assistance was substantially reduced in the late 1990s, SNAP has stood the test of time. Taxpayers, it turns out, prefer that their dollars be spent on in-kind assistance. Ironically, the research on food assistance in the United States suggests that it is nearly cash-equivalent for families, since the size of the benefit is often less than the typical expenditures for food. In this sense, the food assistance directly frees up cash, and families benefit from that flexibility even though the assistance itself is narrowly targeted. Despite this, recent debates about whether sugary beverages ought to be SNAP-eligible purchases suggest that the public remains fairly confident that in-kind benefits can (and should) be used to control recipients' consumption quite directly. It seems in this case that public trust is severely lacking.

Movements toward additional conditions for participation in SNAP and cash welfare payments also underscore the role of suspicion as a foundational axiom on which policy is sometimes built. The recent public push for drug testing of welfare recipients demonstrates a specific dimension in which the public does not trust recipients. Even more than that, suspicion piles up right where we would expect based on the other trust research: Chris Ledford finds that states with more minorities on welfare, all else equal, were more likely to add drug testing to eligibility requirements. Studies by political scientists Alison Harell, Stuart Soroka, and colleagues, with experimental data gathered from Canada, the United States, and the United Kingdom, find evidence of racial and ethnic bias in citizens' support for public assistance programs. They also identify large differences in public willingness to support individuals based on perceived "deservingness." In this context, trust is tenuous at best.

First, we must be honest: inherent uncertainty cannot be solved by trust.

Meanwhile, new research—mostly from pilot programs in developing countries—is repeatedly affirming that cash assistance is indeed an incredibly effective policy tool for reducing poverty, improving health, and increasing schooling. Old ideas about cultural differences as the explanation for practices like child labour (rather than sheer need) have been widely discredited; we now know that when parents have resources, they send their children to school. It remains to be seen whether public trust will be sufficient to bring these "unconditional cash transfer programs" to as large a scale as they could, given their proved effectiveness.

Transactions related to our health are also particularly sensitive when it comes to trust. What is it about health care that makes trust such a key issue? I see health transactions facing at least three major challenges, each of which economists study extensively, and all of which point both to the need for trust and the difficulty in establishing it.

First, there is tremendous inherent uncertainty in the market for health. In fact, we don't have a market for "health"—although that's probably what we'd like to buy— because it turns out that health is not for sale. We have a market for health care, which we hope will move us toward health. Thus the good itself is ill-defined, and our ability to get something worth paying for is uncertain. This uncertainty applies not just to the patient but also to the doctor, who despite a noble effort may be unable to successfully treat a problem. The proliferation of malpractice lawsuits likely reflects this challenge of being unable to buy health even when we wish to. We want someone to blame when our purchase of health care does not result in health.

Second, doctors and patients have asymmetric information. Typically, patients know more about their symptoms, genetic predispositions, and health behaviours than the doctors do, while doctors know more about the possible testing, diagnoses, and treatment than patients do. In other words, even the health care to be "sold" in the transaction is rather fuzzy. Buyers aren't sure what they want to buy, and doctors can't always determine what they should sell.

Society needs to make sure there’s “something to lose” when a trust-professional fails to be trustworthy

Add to these the final problem—the veritable icing on the cake of this frustrating market—incompatible incentives. Not only do doctors not know as much about their patients as they might like, but patients don't always find it to be in their interest to share all of the relevant information. To the extent that admitting you overeat or use drugs or engage in unprotected sex might result in a lecture or other consequences, you may selectively omit details that might be relevant to your condition, making it harder for the doctor to successfully diagnose or treat you. (Has anyone really admitted to their dentist how seldom they floss?) This problem, too, goes both ways. Like any service provider, doctors need to make a living selling their wares. Since patients aren't always sure what they need, doctors find themselves in a position of power to suggest what patients ought to buy. The excessive, expensive diagnostic testing we see debated in health care policy in the United States is an example of this "physician-induced demand." Even a doctor who intends to be fully ethical may sometimes find it difficult to avoid conflicts between the practice's financial interests and those of the patient. Competition among practices, in fact, could threaten profitability in a way that amplifies this pressure on doctors. Moreover, selling potentially superfluous services is easy to justify: most patients pay only a small fraction of the price of those services because of insurance, and the uncertainty in the diagnostic process means a test might be considered reasonable even if it isn't costeffective or strictly necessary. The many structures of payment across the world's health-care systems attempt to get around this underlying reality, some more successfully than others.

As we consider this market, fraught with uncertainty, asymmetric information, and incompatible incentives, it becomes clear that many things can go wrong. And so we return to the role of trust in such a system. How can trust help? First, we must be honest: inherent uncertainty cannot be solved by trust. Uncertainty will be a characteristic of health care in any context, whether abundant in trust or devoid of it. However, trust can make a big difference in the other challenges of this market. After all, asymmetric information is only a problem when that information remains hidden, and trust breaks down the incompatible incentives between patient and doctor that preclude that honesty. If a patient trusts the doctor enough to share all of the relevant information, even when uncomfortable or even incriminating, the doctor has the best chance of making an accurate diagnosis. And if the doctor is trustworthy, the treatment proposed will be for the good of the patient above any other incentives that doctor may face. Ultimately, trust works against the temptation to let incentives get in the way of honest communication and a wise treatment plan. Successful interactions of this kind build patient trust, moving us toward increasingly effective health-care provision. If trust is broken, however—especially by a doctor acting outside a trusting patient's best interest—the problem of asymmetric information could be exacerbated to the point of total market failure, where suspicion keeps people from visiting doctors at all.

Because trust is so important for improving the otherwise dire situation of the market for health care, it's worth asking what can be done to build trust in such an environment. We see one early insight in 1776, when Adam Smith published Wealth of Nations. One of Smith's five explanations for wage differentiation between professions was as follows:

The wages of labour vary according to the small or great trust which must be reposed in the workmen. The wages of goldsmiths and jewellers are every-where superior to those of many other workmen, not only of equal, but of much superior ingenuity; on account of the precious materials with which they are intrusted. We trust our health to the physician; our fortune and sometimes our life and reputation to the lawyer and attorney. . . . Their reward must be such, therefore, as may give them that rank in the society which so important a trust requires.

Framing it differently, Smith is arguing that society needs to make sure there's "something to lose" when a trust-professional fails to be trustworthy. This compensatory perspective effectively says to these professions, "Here is a higher salary to help you avoid the temptation to swindle me, because we both know you have the upper hand here." If we underpay the jeweller, what's to stop him from running off with the jewels? Of course, integrity will help (!), but Smith's point is that the incentives remain incompatible. We need doctors to be compensated sufficiently to make lifelong service with integrity more profitable than unethical revenue seeking; we spend some extra money up front to align incentives so that trust is less threatened. Economic research on doctors' salaries in the United States suggests that this wage premium is large, as the role of observable factors like educational time and cost doesn't sufficiently explain the high salaries we see. While added compensation doesn't fully solve the trust problem, poor compensation could surely make it much worse, as evidenced by the prevalence of doctor bribery in developing countries.

The public expects organizations with faith commitments to be able to overcome incompatible incentives and align with the needs of their patients.

What else can be done to build trust? From the perspective of patients, there is evidence that more trust is placed in notfor- profit institutions. A recent Health Affairs piece by Mark Schlesinger, Shannon Mitchell, and Bradford H. Gray analyzes surveys between 1985 and 2000 and concludes that most Americans expect nonprofit hospitals and health plans to be more trustworthy, fair, and humane. It would be a surprising coincidence if this finding were unrelated to the connections of many health-care providers to religious communities. Apparently the public expects organizations with faith commitments to be able to overcome incompatible incentives and align with the needs of their patients. This public trust should encourage such communities to live up to those expectations, both for their own spiritual health and for maintaining their reputations as trustworthy care providers to their communities.

Expectations are, in fact, basic to the very concept of trust, both in the health-care context and more broadly. While meeting expectations builds trust, failure to meet expectations can be a wrecking ball. In her work on trust in health-care contexts, Lucy Gilson discusses how confidence in such expectations can be established. She identifies the layers of health-care institutions as factors in trust-building: a patient does not just trust (or distrust) an individual doctor, but has some overarching view of whether a practice is trustworthy. Positive experiences with a specific healthcare provider will build on the patient's existing trust in the larger institution, and even the profession. As Gilson puts it, "Individuals act as the access points of social expert systems," and interactions with those individuals drive the improvement or deterioration of trust in their institutions (which feeds into the trust afforded the next individual operating as an access point). And perhaps because the health-care profession recognizes the challenges of maintaining trust—when doctors face incentives to exploit trust and the reputation of the whole profession could suffer from one bad apple— becoming a doctor requires not just technical training but also licensing (to help formalize reputation) and a commitment to ethical codes such as the Hippocratic oath. For a faith-based organization, the additional linkage to explicit faith commitments further enriches the soil in which trust can grow. The opportunity for trust (and outcomes) to flourish as we meet high expectations—through both organizational integrity and individual interaction—applies broadly to health care, social services, and other public services.

Keeping the trust

I find myself encouraged by the trust we find when we look around at our economic lives here in North America. While we need not (and should not, as Christians) place our trust in the economy, it is clear that trust is functioning well in many arenas of economic life. However, in those messy areas where public or private trust is hard to build, Christian organizations and churches may have a distinctive role as trustworthy communities that view people through the lens of faith rather than suspicion. Even outside these organizations, individuals whose daily work involves serving others can set a tone of openness and trust. For all of us, trust ultimately comes back to the personal; organizations build trust by proving they are trustworthy, and so must each of us.

Image: "Visitors" by Robert Pope, courtesy of the Robert Pope Foundation.
 

Sarah Hamersma (Ph.D. economics, University of Wisconsin at Madison) is an associate professor of Public Administration and International Affairs in the Maxwell School at Syracuse University, where she is also a Senior Research Associate with the Center for Policy Research. She trains students interested in public service and policy analysis, and her research is focused on examining both intended and unintended consequences of anti-poverty programs.

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