The Cost of Trust: A Pilot Study

Abstract

Trust is a fundamental precondition underpinning exchange and economic coordination but is costly to maintain. Given the potential for agents to enjoy zero-sum gains by opportunistically betraying the trust of exchanging counterparties, an edifice of occupational roles, organisational forms, and institutional practices have emerged in an effort to uphold trust. In simple terms, there exists a “cost of trust.” This paper provides numerical estimates of the cost of trust for the United States economy, based on an attribution of laborforce occupational data with varying degrees of trust-maintenance. Occupations represented in high cost-of-trust activities include managers, lawyers, and judges, tax professionals, accountants, and auditors. Overall, it is estimated that the cost of trust accounts for 35 percent of U.S. employment in 2010. The cost of trust has significant implications for the economic applicability of blockchain compared with conventional forms of ledger technology largely maintained by centralised third-party organizations.

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Competing In terests:
None declared.
Ethical approval:
Not applicable.
Author’s
contribution:
SD1, MN2 and JP3
designed and coordinated
this research and prepared
the manuscript in entirety.
Funding:
None declared.
Acknowledgements:
None declared.
Peer-R eviewed Research
OPEN ACCESS
ISSN Online: 2516-3957
ISSN Print: 2516-3949
https://doi.org/10.31585/jbba-1-2-(5)2018
The Cost of Trust: A Pilot Study
Sinclair Davidson1 PhD, Mikayla Novak2 PhD, Jason Potts3 PhD
RMIT Blockchain Innovation Hub, School of Economics, Finance and Marketing, RMIT University, Australia
Correspondence:
mikayla.novak@rmit.edu.au
Received: 9 August 2018 Accepted: 23 September 2018 Published: 6 October 2018
Abstract
Trust is a fundamental precondition underpinning exchange and economic coordination but is costly to
maintain. Given the potential for agents to enjoy zero-sum gains by opportunistically betraying the trust of
exchanging counterparties, an edifice of occupational roles, organizational forms and institutional practices have
emerged in an effort to uphold trust. In simple terms, there exists a “cost of trust.” This paper provides
numerical estimates of the cost of trust for the United States economy, based on an attribution of labor force
occupational data with varying degrees of trust-maintenance. Occupations represented in high cost-of-trust
activities include managers, lawyers and judges, tax professionals, accountants and auditors. Overall, it is
estimated that the cost of trust accounts for 35 per cent of U.S. employment in 2010. The cost of trust has
significant implications for the economic applicability of blockchain compared with conventional forms of
ledger technology largely maintained by centralized third-party organizations.
Keywords: blockchain, measurement, opportunism, transaction costs, trust
JEL Classifications: D02, J21, K42, O33, Z13
1. Introduction
Assessments of the economic dimensions of trust
appear to have enjoyed a resurgence of interest in recent
decades. Despite the contribution of trust in promoting
coordination economically, it is conceded trust is an
economically fragile condition potentially degraded by
a temptation to attain zero-sum gains by acting
dishonestly, therefore betraying trust [1]. An
environment conducive to trustful economic relations
thus requires various kinds of commitments, supported
by the allocation of resources, on the part of agents.
This very notion of commitment implies there are costs
incurred to uphold trust amongst heterogeneous agents
in the face of bounded rationality and opportunism [2].
The institutional economics literature has illuminated the
various ways in which economic agents partake in efforts
to enforce trust amongst each other. Contracts may be
structured to encourage parties to act in a trustworthy
manner [3, 4]. Coase [5] alluded to the rationale for the
modern corporation as resting in the desire to avoid
potential mistrust in bilateral market trades. The aim of
this paper is look beyond specific arrangements, as
important as they may be, and consider the broader,
economy-wide costs incurred in efforts to minimize
exchange-related mistrust.
One of the distinctive contributions of this paper is
that we provide preliminary numerical estimates of
the economy-wide “cost of trust” for the United
States. Drawing upon detailed occupational data it is
illustrated that the cost of trust is sizeable, in terms of
the employment share of the economy.
The importance of the cost of trust in modern
economic management is underlined by recent forms
of ledger innovation. The adoption of distributed
ledger technology, maintaining cryptographically-
secure distributed databases on peer-to-peer
computing networks, is held to reduce the cost of
opportunism and, consequently, galvanise trust with
respect to data integrity [6]. It is supposed that one
way that blockchain could reduce the cost of trust is
through the use of smart contracts to substitute for
conventional activities that aim to uphold trust within
labour markets.
2. Trust: Economically valuable, but costly to
maintain
It is a truism to suggest that, as sociable animals,
human beings are dependent on other people, not
only for survival but for the achievement of deeper
senses of flourishing. Although the significance of

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trust has long been recognized by researchers, including in the
economics discipline, the definition of trust itself is subject to
considerable ambiguity. For convenience, we draw upon the
Oxford Dictionary definition of trust to describe it as a state or
precondition wherein a person (or persons) has (or have) a belief
in the reliability, truth or ability of someone or something to
undertake or perform a given task or objective (tangible or
intangible). Subsumed within this definition is an appreciation that
trusting relations consist of the qualities of vulnerability, risk and
expectation (or uncertainty) [7].
The first aspect of trust (vulnerability) refers to a given individual’s
ex ante belief that others will at least not betray them, when they
need not be obliged to do so. It is in this context that we suggest
trust is a relational attribute with two generic classes of people
involved: the trustor and trustee. The trustor is the party who
places themselves in a vulnerable situation, whereas the trustee is
the party on whom trust is placed and who has an opportunity to
potentially take advantage of the trustor’s vulnerability [8].
Trust is also supposed to entail risk [1, 9]. As suggested by Oliver
Williamson, “trust is warranted when the expected gain from
placing oneself at risk to another is positive, but not otherwise.
Indeed, the decision to accept such a risk is taken to imply trust”
[9, p. 463]. Of course, it is possible for the trustor to avoid a risky
situation by abstaining from exchange. However, when doing so
one forgoes the associated advantages that go with exchanging with
the trustee, should trust be maintained [10].
Finally, there is the expectation that the trustee will not take
advantage of the opportunities opened up to betray the trustor’s
trust. Trust is warranted when the trustor expects the benefit from
making themselves vulnerable to the trustee (whose behavior is,
ultimately, not amenable to control) to be positive [11]. In the
absence of uncertainty, trust is not a significant issue under a
certain scenario the outcome is the same whether a trusting act was
involved.
In an industrialized market sphere, one may discern generalized
trust as entailing the fulfilment of commitments made in an
exchange process. In a generic sense it is said that, “whenever there
are gains from trade, there is a productivity advantage to any
institution or norm that assures traders that the other side will hold
up their end of the deal” [12, p. 83]. Whilst this statement is
generically correct, the many guises of market activity dictates that
the economic manifestations of trust are equally highly contextual
in nature [13].
Let us consider the conceptual basis for trust as described by
institutional economic theory. Writing in 1937, Ronald Coase
famously asked: if market activities are so efficacious, as is so often
lauded by economists, then why is so much market-oriented
activity practically mediated through organisations such as
centralised, hierarchical firms? His answer is that conducting
exchange transactions within markets is quintessentially costly [5].
There are “transaction costs” incurred in “obtaining relevant
information, the cost of bargaining and making decisions, and
finally the costs of policing and enforcing contracts” [14, p. 180].
For Coase, the firm helps absorb transaction costs enabling
transaction possibilities, and economic coordination, to expand.
Oliver Williamson extended Coase’s insights by theorizing about
when internalization of transaction costs is the preferred strategy
for launching productive economic activity. Williamson [2, 9]
suggests that internalization is necessary under conditions of
bounded rationality, small numbers of trading partners, asset
specificity and, most importantly, the exercise of opportunism in
exchange relations. Opportunism suggests that economic agents
will act strategically, “a condition of self-interest seeking with guile”
[2, p. 30], to the detriment of the economic interest of others. The
potential for incomplete contracting prevailing in economic
situations, including as a result of “hold up” refraining to commit
to contractual terms, also suggests that opportunism is an
important problem to be redressed [15].
Williamson is at pains to stress that not everyone will constantly act
in an opportunistic manner. Nonetheless, institutions are seen as
necessary to enforce trustworthy behavior on the part of those who
are otherwise prepared to exhibit opportunism in economic
exchange. The modern firm, for instance, is not only an
organizational strategy to redress transaction costs but is an
evolved hierarchical structure of contracts aimed at solving the
opportunism problem [16].
At this point it should be recognized that scarce economic
resources are absorbed in the process of upholding the trust which
leads to reductions in transaction costs and dynamic improvements
in economic coordination. In short, there is a cost of trust that
should be duly considered within the broader purview of trust
discourse. The notion of the cost of trust is prevalent in numerous
activities undertaken by economic agents – e.g. IT security
spending, costs of record keeping, managerial control and
workplace surveillance, advertising and product branding, and so
on.
In no small part, the cost of trust is influenced by the context in
which trust-building efforts are maintained. Economic exchanges
differ in their complexity and their scope for opportunism. It seems
generally costlier to instigate specialized, trust-galvanizing
mechanisms when exchange occurs only once or infrequently.
Bromiley and Harris indicate that “optimal governance structure
should vary depending on these assessments. Economic actors
should build less costly control systems for relatively trustworthy
people than for less trustworthy people” [17, p. 126].
We concede there is some overlap between the cost of trust and
generic transaction costs associated with market exchange. The
costs borne by individuals to demonstrate they are trustworthy is
but one aspect of total costs in engaging with others economically.
For example, the cost of trust is distinct (though not completely)
from the search costs of obtaining information about goods and
services. From this standpoint the cost of trust can be assumed to
be sub-set of transaction costs, which have been estimated to
account for a sizeable portion of national product [18].
It should be briefly noted there are similarities between our
research and the effort of McCloskey and Klamer [19] to establish
a “cost of persuasion.” Referring to the cultural and sociological
dimensions of trust, Paul Lewis suggests that trust represents an

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inter-subjective social reality promulgated through (time-
consuming) discursive activity: “talk (along with other features of
conversations, such as smiling and laughter) is central to the
creation of trust” [20, pp. 189-190]. We concur with these
assessments that persuasion can be trust-building, but that trust
also helps create the social context in which persuasion is used [21].
3. Measuring the trust economy: Cost of trust estimates for
American economy
3.1 Method
In this paper we attempt to provide a preliminary assessment of
the cost of trust for key segments of the United States economy.
This raises the immediate question: on what basis might activity be
delineated on the basis of the cost of trust?
The methodological approach employed in this paper is similar to
that presented in [19]. The 2012 Statistical Abstract of the United
States [22] reported that there were about 139.1 million civilian
non-institutional employees aged 16 years and over in 2010. Table
616 of the Abstract provides information on the number of
employed civilians by the following occupational categories:
management, professional and related; service; sales and office;
natural resources, construction and maintenance; production, and
transportation and material moving. A further employment-by-
occupation breakdown is provided in the Supplemental Material.
We present an aggregate cost of trust by subjectively assigning
weights to occupations. These weights reflect an assessment about
the percentage of time or marginal product in each occupation
spent on maintaining or improving trustful relationships. A weight
of 1.0 indicates that personnel in an occupation given such
weighting spend all their time or effort in upholding trust. Other
weights used in this paper (0.75, 0.50 and 0.25) reflect our
assessment that employees in the relevant occupation use 75 per
cent, 50 per cent or 25 per cent of time or marginal product to
uphold trust, respectively.
Cost of trust weightings are assigned to all occupations. Once
weights are assigned, the employment figures are multiplied by the
weight to give a “cost-of-trust adjusted” employment total for the
U.S. economy. This aggregated total indicates the amount of
employment absorbed by (costly) activity dedicated to upholding
trust in the economy.
Although the assignment of weights to occupational categories are
subjective, they are informed by judgment partly relying upon
sources we consider help gauge the extent to which certain
employees primarily engage in trust-upholding activity:
•!It is estimated in [18] that the aggregate size of transaction
costs in the U.S. economy over the period 1870 to 1970 by
demarcating occupations (and industries) into transaction and
non-transaction-intensive classifications. The transaction
cost-intensive occupations include managers, owners and
proprietors; foremen; sales workers; clerical workers;
professional workers; and protective workers. Wallis and
North [18] consider the costs borne by sellers and buyers to
establish market credibility as a transaction cost component.
These costs could also be considered to be part of the cost of
trust.
•!In [19] subjective weights were assigned to occupations on the
basis of the perceived proportion of time that laborer in varied
occupations engage in persuasive communication with client
groups. Lawyers, judges, public relations specialists,
managerial supervisors, and salespeople were classified as
belonging to the high-persuasion category. Persuasion is
undertaken for a variety of reasons economically, one of which
is that a party to a potential transaction (usually a seller) wishes
to communicate they are trustworthy as an exchange partner.
•!A December 2017 Gallup survey provided information on the
degree to which people in various occupations are rated
“high” or “very high” with regard to honesty and ethics [23].
Amongst the occupations rated as highly or very highly honest
and ethical include nurses, teachers, doctors and police
officers. People in occupations rated honest and highly ethical
are, ceteris paribus, perhaps less likely to endure costs
associated with developing or demonstrating trustworthiness
in economic exchange.
In addition to these sources, we draw upon the recent literature of
occupational task complexity [24, 25] as another background
source of information assisting in the derivation of cost-of-trust
weights. Highly complex occupational roles are perceived to
impose a high cost-of-trust, given the higher probability of
individuals working in such roles to opportunistically betray trust
by taking advantage of informational asymmetries and other
unique features of the working role.
3.2 Results and discussion
The result of the analysis for the U.S. economy in 2010 is presented
in Table 1, showing raw employment-by-occupation subtotals and
cost-of-trust adjusted employment for major occupational
categories. Overall, it is estimated that about 35 per cent of
employment in the United States relates to activity aimed at
upholding trustful economic relationships. The cost of trust ranges
from 48 per cent in management, professional and related
occupations to 13 per cent in natural resources, construction and
maintenance occupations.
Taking a deeper look at the distribution of cost of trust related
activity by sub-category, the cost of trust accounts for more than
50 per cent of time or product in protective service, health care,
business and financial operations and management occupations. At
the other end of the spectrum, it is estimated less than 20 per cent
activities undertaken by those in occupations related to farming,
fishing and forestry and production (a broad category largely
encompassing manufacturing activities) are accounted for by the
cost of trust.
3.3 Caveats
It is stressed that the results presented in this paper are preliminary,
and subject to several qualifications. The most important of these
is that the occupational trust weightings are subjective. A cost of
trust reweighting of the occupational figures will yield different
results, both in terms of the aggregate cost of trust adjusted

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employment data, as well as the distribution of occupations by
weight.
Other measures to establish the cost of trust are potentially
available. It may be possible to use a proxy measure of regulatory
intensity to indicate which economic activities bear a heavier cost
of trust. One may associate the degree of trust, for example, on an
industry basis with a measure of “regulatory restrictiveness” [26,
27]. The regulatory restrictiveness measure, provided by the
Mercatus Center of George Mason University, provides a count of
words contained in U.S. federal legislation which is likely to limit
economic and social choices, such as the words “shall,” “must,”
“may not,” “prohibited” and “required.” In this context, it is may
be possible to conceive certain industries as necessitating a
relatively high cost of trust to maintain their operations.
Another, and arguably more straightforward method, is to itemize
and aggregate the level of expenditures undertaken by the private
and public sectors to maintain trust in their operations. Such
expenditures may include IT security expenditures, record auditing
costs, the costs of tax filing, and the costs of complying with certain
government regulations.
4. Significance of cost of trust in presence of distributed
ledger technology
A host of techniques and strategies have been developed to solidify
trust economically. These include the development of a sound
personal reputation, ratification of contractual arrangements,
creation of firms that organize internal transactions and propagate
a “corporate culture” of honesty and reliability, and state
institutions to enforce trustworthy behavior and punish trust
defection.
Another, albeit much underappreciated, practice to uphold
generalized trust comes in the form of a ledger. In a generic sense,
the purpose of a ledger is to record and verify facts in their
economic, political or social manifestations. Ledgers contain
information jointly known about matters such as ownership,
identity, relations and exchange, all of which elicit economic
activity [28]. To promulgate a sense of generalized trust in a human
context, with idiosyncratic individuals maintaining different
languages, cultures, perspectives and objectives, ledgers help
establishes some kind of “common reality that everyone can bind
to” [29, p. 33].
The maintenance of ledgers has been identified by some scholars
as pivotal to long-run economic development [30, 31], and they
also appear to be a necessary condition for trustful relations to
occur. However, this condition is by no means sufficient because
opportunists could enjoy zero-sum gains by falsifying ledger
Table I: Distribution of United States occupational employment, adjusted for cost of trust [22]
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Occupation Total employed (00 0s ) Total , weigh ted by CoT (000 s)
Total , 16 years and over 139,064 48,338
Management, professional & related occupations 51,743 23,152
..Man agement 20,938 10,604
..Business an d finan cial operations 5,937 3,236
..Computer and mathemat ical 3,531 1,017
..Architecture an d eng ineering 2,619 951
..Life, physical, and so cial scienc e 1,409 334
..Communi ty an d so ci al serv ices 2,337 918
..Educat ion, training, an d lib rary 8,628 3,915
..Arts, design, entertainment, sports, and media 2,759 748
..Heal th ca re p rac titioner and techn ic al 7,805 4,666
Service occupations 24,634 8,765
..Heal th ca re su pp ort 3,332 2,143
..Protective service 3,289 2,243
..Food preparation and serving related 7,660 1,914
..Building and ground s clean ing and maintenance 5,328 1,332
..Personal care and service 5,024 1,134
Sales & office occupations 33,433 9,937
..Sales and re la ted 15,386 4,198
..Office and ad minist rat ive supp ort 18,047 5,739
Natural resources , construction, and maintenance occupations
13,073 3,298
..Farming, fishing, and forestry 987 26
..Construc tion an d extractio n 7,175 1,623
..Installation, maintenance, a nd rep ai r 4,911 1,020
Production, transportation, and material moving occupations 16,180 3,187
..Production 7,998 1,295
..Tran sportation a nd material-movi ng 8,182 1,892

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information. For ledgers to be economically effective there must
be a high degree of trust in them.
In the modern economy, firms and governments have come to act
as “controlling authorities” over the state and condition of ledgers.
The extent of allotted authority to such organizations include what
kind of information is to be (or not to be) presented in a ledger,
and what sorts of information is allowed (or not allowed) to be
added. This “institutionalized trust” has, to a considerable extent,
relegated (or even displaced) the role and importance of
personalized, small-scale trust networks into the background of
contemporary economic affairs.
The emergence of third party, ledger-controlling organizations,
which tend to exude hierarchic list and centralist characteristics,
have been associated with economies of scale and the Weberian
rationalization of political affairs. However, it has become
apparent, at least in some quarters, conventional ledger controls
have, themselves, come at some cost. For example, control over
ledger information by firms and governments potentially enable
them to concentrate power and capture significant rents [32].
Even more fundamentally, it is debatable to what extent the
organizational arrangements described here actually promote trust.
Centralized, hierarchical entities unwittingly pose as single points
of attack by cheaters, fraudsters, hackers and others seeking to
manipulate data to their advantage (in the field of accounting, for
example, see Jones [33]). In other words, hierarchical centralization
is insufficient to protect the integrity of ledgers. The imposition of
top-down ledger protocols could also reduce the degrees of
freedom to discover alternative bases of trust within society,
undermining intrinsic motivations by diverse economic actors to
forge trusting relations.
Despite the longstanding methodological attributes of ledgers, and
the organizational apparatuses used to sustain them economically,
in recent years ledger technologies have been subject to significant
innovation. One of the more prominent instances of ledger
innovation has been the blockchain – a ledger enabling data and
information to be appended, stored and validated on a
cryptographically-secure basis amongst a distributed, peer-to-peer
network of computers. The blockchain aims to operate in such a
way that “the integrity of the devices and of the transactions can
be assured by a tamper-proof record that both parties can trust,
this mutual lack of knowledge about each other doesn’t manner”
[29, p. 127]. This starkly contrasts the traditional model predicated
on intermediated (but tamper-prone) third parties claiming
authoritative control over ledger amendment, security and
verification, in the name of galvanizing trust.
A key method through which blockchain can serve to uphold trust
is through the design and maintenance of “smart contracts,”
defined as “computer programs that secure, enforce, and execute
settlement of recorded agreements between people and
organizations” [34, p. 101]. It is conceivable that the blockchain-
enabled smart contract could serve as a pivot to help reduce the
cost of trust, at least relative to techniques employed in the
conventional economy. As explained by Van Rijmenam and Ryan
[35], “smart contracts are automatically and autonomously
executed, thereby taking out the need for human judgement and
minimizing the need for trust. In addition, smart contracts remove
the need for developing, implementing, or evaluating decisions by
management or employees … it becomes possible to automate
decision-making” [35, p. 20].
Given the terms of the smart contract are defined, executed and
enforced by its underlying programming code, there appears a
lesser need to maintain those pervasive, yet costly, timing-
consuming and labor-absorbing, techniques to uphold trust in the
non-blockchain economy. The opportunity to relieve workers of
tasks dedicated toward upholding trust has potentially significant
implications for future labor markets.
The cost of trust could, in one sense, be reduced to the extent that
smart contracting adoption displaces existing occupational roles
mainly devoted to upholding inter-personal trust
(“Schumpeterian” role disruption mechanism). Consider, for
example, the potential of smart contracts to automate legal and
regulatory provisions could displace (to some extent) the need for
lawyers [36]. The diffusion of smart contracts, and the concomitant
devolution of complex agreements and standards to the
blockchain, could also enable workers to renegotiate working roles
away from trust-intensive activity and toward service delivery,
strategic thinking and other roles (“Kirznerian” role arbitrage
mechanism). Both mechanisms are likely to operate in
complementary fashion and are hypothesized to potentially reduce
the cost of trust as blockchain, and in particular smart contracting,
become more prevalent.
We suppose that the cost of trust represents a standalone cost
category to ensure the conduct of exchange relations in the
economy grounded in trustful relations. As this paper suggests, the
cost of trust in a non-blockchain environment predominated by
third-party, centralized trust hierarchies is relatively substantial in
an economy-wide perspective. Cost of trust estimates should be
compared against the costs of blockchain use cases as an alternative
to the conventional trust-model of organizational hierarchy, or of
“forking” exercises within blockchain spaces intended to create
new domains of distributed trust.
5. Conclusion
There has been scant recognition thus far to the idea that the
establishment and perpetuation of trust in the economy
necessitates investment and other efforts and, as such, trust is
costly. Using an occupational dataset for the United States, we
establish that the cost of trust is a significant economic factor in
the modern economy. The aggregate cost of trust (proxied by the
amount of time and effort expended in each occupation to uphold
trusting relations) were estimated to account for about 35 per cent
of U.S. employment in 2010. To put it simply, the cost of trust to
the American economy is considerable.
This study draws attention to the significance of the cost of trust
in the context of ledger innovation, chiefly in the form of
blockchain (distributed ledger) technology. Questions concerning
the economic value of blockchain vis-à-vis conventional ledger
technologies would ideally incorporate cost of trust considerations
in their appraisals. In addition to this, specific applications of ledger
innovation could also be the subject of cost of trust research. The
potential for “tradetech” (i.e. the application of distributed ledger
technology and other technological advances to supply chain

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management) to reduce the cost of trust amongst supply chain
participants is one example of this.
We also see the cost of trust as a generalized framework for
rigorously contemplating the implications of trust bonds between
exchanging parties in the economy. Has the cost of trust changed
over time and, if so, how? What is the empirical relationship
between the cost of trust and aspects of macroeconomic or
industry-level performance? Does the cost of trust meaningfully
affect labor markets in any meaningful fashion, including through
the generation of wage premiums? How do public policies, and
even forms of public governance, interact with the cost of trust?
There is also a scope to refine the methodology for estimating the
cost of trust as new and improved forms of data become available.
These are only a few of the potential array of issues amenable to
further investigation by economists and other social scientists with
an interest in matters of trust.
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