Trust and economics
Acknowledging that cultural attitudes can influence economic decisions raises a question: Which attitudes? Over the years, the bulk of Sapienza's own research has focused on trust.
"My view has always been that trust is one variable that is highly cultural, often transmitted from parents to kids," she says. "Think about the recommendation in some cultures not to trust anybody.”
Growing up in an environment where you are told not to talk to strangers or rely on government officials sets you up to expect the worst from every encounter with a person or the state -- and behave accordingly.
The economic implications of low trust can be vast. "Trust is quintessentially one of the most important ingredients in economic transactions," says Sapienza. Sure, we can -- and should -- write contracts. But no contract will cover every contingency.
"You have to trust the person you're negotiating with that eventually we're going to work together to work things out," says Sapienza. "While trust is fundamental to all trade and investment, it is particularly important in financial markets, where people part with their money in exchange for promises."
Trust levels differ wildly from one country to another. In Brazil, it is very low. In Northern European countries, it is much higher. And trust is strikingly persistent.
This is partly just a common-sense reaction to reality: if you live in a low-trust society, "it's optimal for you to teach your kids not to trust," says Sapienza, "because if you're the only one trusting, you're very likely going to be surprised by somebody taking advantage of you."
"In a culture where everyone is trusting, and there is therefore more cooperative behaviour, the optimal thing to teach your kids is indeed to trust others. This transmission of cultural attitudes may have big economic consequences."
Living without trust
Sapienza has found that people tend to write fewer financial contracts in areas where the level of trust is lower. This unsurprisingly has a negative impact on economic development.
"You have worse financial allocation," says Sapienza, "because the quintessential mechanism of a free market economy is that people who have the capital are not necessarily the people who have the ideas. In order to put capital to use, you really have to make it circulate."
Another of Sapienza's studies finds that just how much citizens of one European country trust those of another impacts their willingness to engage in mutually beneficial financial transactions.
Countries that do not share a national religion, have a history of war with each other, have fewer genetic similarities, or even simply possess negative stereotypes about each other are less likely to trade and invest in each other.
But trust does not just differ from nation to nation. In yet another study, Sapienza and her colleagues find that even within a state, individuals who are more trusting have riskier stock-market portfolios.
"People who believe that others can be trusted in general ... end up putting their money to work," says Sapienza, "investing in the stock market more, investing in riskier assets and eventually having a higher return."
Persistence of growth
Sapienza believes that relatively high levels of trust in Northern Italy -- and elsewhere in the world -- stem from historical precedent. Back in the Middle Ages, many cities in Northern Italy, unlike many similar ones in the South, "rebelled against the emperor and became free city states," she explains.
The undertaking required enormous cooperation among various parties and resulted in a much more open, transparent style of government. "What we claim in a recent paper is that this experience has led people to trust that they can change things," says Sapienza.
Today, Italian cities that became free city states over 800 years ago have more non-profit organizations, engage in more blood and organ donation, and raise children less likely to cheat on their national exams than those that did not.
That history begets culture is not an entirely new idea. Nathan Nunn, a professor at Harvard University, finds that even today low levels of trust in some regions of Africa align closely with regions where slave trade caused the most damage.
But perhaps history need not be destiny. Sapienza and other economists would like to find ways to increase trust levels in regions where they have historically been low -- particularly in places where barriers to economic development, such as legalized discrimination, have since been removed. But change will not come easily.
"Where do we start?" Sapienza asks. "If you don' trust anybody, you will not engage in transactions and, of course, the system will not reward you, even when institutional changes have removed discrimination."
"More importantly, if you don't trust, you're going to teach your kids not to trust, which creates a cycle that is difficult to escape."
