On attending a workshop on the emergence of water markets in South Arica, I was again struck by the importance of 'trust' in effective trade. The absence of trust between potential buyers and sellers, and between buyers/sellers and the regulator impedes trade, and at best raises the cost of transacting. Market transactions are a form of collective action and presupposes functioning institutions and networks.
Francis Fukuyama in the Great Disruption said:
It is perfectly possible to form successful groups in the absence of social capital, using a variety of formal coordination mechanisms like contracts, hierarchies, constitutions, legal systems, and the like. But informal norms greatly reduce what economists label transaction costs...
Trust brings costs down and eventually may have an impact on more efficient allocation of scarce resources.
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