Trust pays off
Economist Luigi Zingales explores how cultural
stereotypes influence which countries do business together.
Luigi Zingales, the Robert C. McCormack professor
of entrepreneurship and finance, often arrives en retard.
His tardiness needn’t come as a surprise—it’s
in his nature. “Italians are always late,” he says,
looking the part of a European scholar with his 5 o’clock
shadow and camel-colored coat. Such information is “useful
to know,” he suggests, and may even influence whether different
nationalities will work together.
In fact, studying cultural stereotypes can help
to explain what makes the global economy tick. Preconceptions “have
quite an important influence in international trade,” says
Zingales, who earned his bachelor’s at Italy’s Bocconi
University and his doctorate at MIT. Collaborating with visiting
economics professor Luigi Guiso and Northwestern’s Paola Sapienza,
he has documented how such biases—by influencing the relative
trust one country has in another—affect economic exchange.
A lack of mutual trust, they found, leads to less trade and investments
between private companies. “We’re trying to understand
why trust levels differ so much,” Zingales says from his fifth-floor
Graduate School of Business office. “If we can better understand
this mechanism, we can try to overcome it.”
To analyze the issue, the trio first needed to
establish the trust-culture connection—beyond the objective
characteristics, such as geographical distance or common language,
that people put stock in when sizing up their foreign partners.
“In the absence of that information,” Zingales notes,
“you revert to cultural stereotypes.” Focusing on Europe,
the professors looked at three cultural traits: past conflicts between
countries, religious similarities, and shared ethnic origins.
Public-opinion surveys conducted by Eurobarometer
on behalf of the European Commission provided that data and respondents’
attitudes toward the market. More important, the questionnaires
recorded how much trust the participants had in citizens of each
EU member state. Next the researchers used the answers to compute
mean responses by state, showing that neither close proximity nor
common language alone affects the relative faith one country has
in another. For instance, the British and French—separated
only by the English Channel—tend not to trust each other.
Something beyond the objective is at work.
The three cultural factors, according to the
team’s research, play a significant role in forming trust.
Fewer ethnic ties lowered respondents’ confidence in foreigners
by more than 6 percent. The number of years their states had been
at war in the last millennia also mattered. And between states where
90 percent of the population shared the same religion, as with Italy
and Spain, trust rose 30 percent. Ethnicity and religion, Zingales
notes, are particularly powerful indicators.
The professors set out to demonstrate that trust
directs trade, creating a mathematical model that measures the likelihood
that two parties will pursue a business opportunity. The model calculates
the opportunity’s total value minus the exploration cost.
Plugging the value into an equation that factors in trust, they
found that the opportunity will not be pursued if confidence is
too low. The minimum trust level necessary changes with the expected
profitability—to give the opportunity a try, confidence typically
must be high when potential profits are low, and vice versa. For
example, Zingales says, when IBM wanted to create the first PC and
was desperately looking for an operating system, it turned to Apple’s
Steve Jobs. Jobs, afraid IBM would take advantage of him because
of its self-serving reputation, declined to meet—and missed
out on his company becoming a Microsoft. Thus trust and preconceptions
have a stake in economic exchange.
Going one step further, Zingales, Guiso, and
Sapienza estimated trust’s effect on trade of goods and services,
international portfolio diversification, and foreign direct investments.
Inserting relative trust and financial data—from the global
Organisation for Economic Co-operation and Development and the investment-research
provider Morningstar—into traditional models of exchange across
countries, they showed confidence level is statistically significant.
The theoretical and empirical results, which are being prepared
for publication, offer a possible explanation for some nations’
inability to boost their market appeal—and cause for a makeover.
“The magnitude is big,” Sapienza says. “If cultural
biases are driving economic exchange, it would be beneficial to
remove prejudice.” Countries such as Turkey, whose reputations
work against them in the business world, Zingales suggests, can
try to increase their perceived trustworthiness. For such nations,
he says, “there is a large pay-off in publicity campaigns
in other countries.”
Of course, “trying to explain the success
and failure of nations,” he continues, requires digging deeper
into the inner workings of international trade. The trio hopes to
explore additional variables affecting trade—an educated populace,
for instance, seems more promarket—having concluded in the
study that “perceptions rooted in culture are important (and
generally omitted) determinants of economic exchange.”
Their related research on religion and economics
within countries, rather than between them, has already generated
interest in the relationship. Using data from the World Values Survey,
a collection of questionnaires on values and beliefs in 55 countries
between 1981 and 1997, the professors examined attitudes toward
equality and incentives, private and government ownership, and competition.
They discovered some links between religiosity and support of the
Zingales discussed those findings, published
in the January 2003 Journal of Monetary Economics, at an
October gathering of the Divinity School’s Wednesday lunch
series. Religion, he said, is good for economic development since
churchgoers are generally more promarket. Among religions, Muslims
are more pro-state and antimarket; Christians and Buddhists are
less pro-state and more promarket.
Some of the religious-studies students and scholars
in the audience expressed skepticism, arguing that not all Muslims,
Christians, and Buddhists feel that way. “These things are
generalizations,” Zingales admitted. “It’s important
not to be narrow-minded and say, Because of this, everybody is the
same.” Even he sometimes breaks his own customs. He arrived
at the Div School luncheon two minutes early.—M.L.