Academic journal article Review of Social Economy

Social Capital, Institutions and Trust

Academic journal article Review of Social Economy

Social Capital, Institutions and Trust

Article excerpt

Abstract This paper analyzes the relations between social capital, institutions, and trust. These concepts are full of ambiguity and confusion. This paper attempts to dissolve some of the confusion, by distinguishing trust and control, and analyzing institutional and relational conditions of trust. It presents a tool for the analysis of the foundations of trust, and a diagnosis of its strength and viability.

Keywords: social capital, trust, institutions, control, reliability


If social capital is associated with a set of largely informal relationships that may help the achievement of goals, how is it related to institutions and trust, which may also serve that purpose? Can social capital, institutions and trust substitute for each other, or are they complements or preconditions for each other, or consequences of each other, or all of these? These are the questions for this article. Trust is both an outcome and an antecedent of relationships. It forms a basis for relationships, and thus generates social capital. It may be based on institutions, and it may be built from relationships, and then it arises from social capital.

Trust matters because of relational risk. Here risk is used in an ordinary language sense of being vulnerable to actions of others, and yielding a possibility of loss (Luhmann 1988; Chiles and McMakin 1996). It is not used here in the technical sense of risk, as used in economics, as being amenable to calculus of probability for a known range of possible outcomes, as opposed to 'real uncertainty' where one does not know what may occur (Knight 1921). Some authors proposed that trust can be analyzed as a subjective probability concerning outcomes (Gambetta 1988; Dasgupta 1988; Mayer et al. 1995; Gulati 1995), but in my view possible future behavior of people is subject to more radical uncertainty, due to interactions between people that shift conditions, perceptions, and preferences, so that there is no pre-established range of identifiable possible outcomes (Nooteboom 2002). People may themselves be convinced that they will act in a trustworthy fashion until they meet with unforeseen temptations and pressures that impel them to break trust.

In the literature, trust is seen as both a type of behavior (Deutsch 1962) and an underlying disposition (Bradach and Eccles 1984; Sako 1992; Das and Teng 2001). Deutsch (1962) defined trusting behavior as consisting of actions: (1) that increase one's vulnerability; (2) to another whose behavior is not under one's control; and (3) in a situation where the penalty one suffers if the other abuses that vulnerability is greater than the benefit one gains if the other does not abuse that vulnerability. Bradach and Eccles (1984: 104) defined trust as "a type of expectation that alleviates the fear that one's exchange partner will act opportunistically."

Trust has extrinsic, instrumental value in helping to reduce the risks and transaction costs of relationships. This is particularly important when risks are difficult or expensive to manage by formal means, such as government control, legal contract and hierarchy. Formal means of control can never completely eliminate relational risk, and hence some degree of trust is always needed. Trust may also be valued for its own, intrinsic value (Blau 1964; Arrow 1974; Jarillo 1988; Buckley and Casson 1988; Bradach and Eccles 1984; Powell 1990; Casson 1991, 1995; Helper 1990; Sako 1992; Gulati 1995; Berger et al. 1995; Chiles and McMakin 1996; Nooteboom 1996). While trust may be built within relationships, on a personal basis it may also arise outside relationships more impersonally, on the basis of institutions (Deutsch 1973; Shapiro 1987; Bachmann 2000; Nooteboom 2002), and it may be facilitated by intermediaries or go-betweens (Shapiro 1987; Nooteboom 2002).

Countries vary in the extent that there are institutions that support trust, and to the extent that there are no such institutions, trust must be built entirely from relationships, and without institutional support that can be laborious and such trust can be fragile. …

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