The Role of Trust and Control Institutions in Informal Monetary Transactions

Abstract

Auxiliary institutions fail to perform the function of protecting economic agents trust in the liquidity of various monetary obligations. Still, despite these conclusions, there exist some forms of monetary arrangements that seemingly demonstrate a high level of trust among their participants. The durability and continuous reproduction of these monetary arrangements in both developing markets and mature economies need to be explained. Part of this explanation has to address the question of trust arising among the parties to these financial transactions and its role in preventing opportunism and breach of promises made by their participants. As shown in this paper, a possible answer to this question might consist in the argument that the protective role of trust in these financial arrangements is replaced by the opposite norm of control over the agents behavior within close-knit social and economic communities. The degree of control may vary, but control always crowds out trust in order to add reliability to these financial setups.