Thursday, October 01, 2015

[zpcpiymu] Trust and the liquidity constraint

Many social mechanisms seems to be for the purpose of establishing trust relationships.  However, seemingly a well known simple financial mechanism could replace them all: the person seeking to be trusted posts a bond that the person trusting can collect if the trust is violated.

However, this mechanism doesn't work if the seeker does not have enough money to post the bond.  Normally, not having enough money is again simply solved by borrowing money, but this requires a lender who trusts the borrower: a catch-22 of trust.

What can solve this vicious cycle?  Perhaps income redistribution, perhaps transparency.

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