I got my eyes opened by two young Turks. Well, no, not Turks, actually Indians: Sumit and Srikant. I was consulting for their employer in Mumbai several years ago. They needed an email server with more oomph than their existing one. In ten days, we designed, procured, and set up a replacement cluster of servers.
The evening I was to leave, they spoke to me of trust, and how, after working with me, they trusted me. I was somewhat nonplussed. "Of course I should be trusted -- I am a highly-paid and experienced professional." No, they said, in India it works the other way around: first you do business with someone, then you learn to trust him.
A lack of trust makes it hard to do business. If you don't trust someone, you have to set up some mechanism for resolving the trust. For example, when Sumit was checking me into the Leela (a five+ star hotel), I noticed that he had to pay a deposit in cash in addition to paying with a credit card. I didn't understand it at my arrival, but I understood it at my departure.
By the way, you should know that any credit card charge can be disputed. You simply tell the bank that you refuse to pay that particular charge, and they will take it off your bill. You have three months in which to do this. The company that generated the charge must then provide proof that you authorized the charge, that the items were as represented, that you actually received them, etc.
Transaction cost is the cost of making a business deal. For example, the time spent weighing one deal against another is the transaction cost. Your time spent going to the store, standing in front of the display, considering the value of a purchase, standing in line at the register, and returning home, are all part of the transaction cost of shopping.
A lack of trust adds to the transaction cost. Instead of buying something sight-unseen, you have to verify that you are actually getting what you are paying for. People do this for large purchases, e.g. by walking through a house, and paying for a professional inspection of the house. That's because the value of the transaction greatly outweighs those transaction costs.
A culture, or society, where businessmen cannot be trusted, is an economically-inefficient society.
posted at: 21:44 | path: /economics | permanent link to this entry