How deep is Chinese distrust?

I discovered an interesting new blog by a Chinese economist named Helen (He) Yang of Xiamen University. She studied at George Mason (combining two of my interests, China and GMU.)

Given the same bundle of technologies, why does China end up with a more costly method to organize the rental market than the U.S.? Apparently the transaction costs of renting an apartment in China is much higher. Using Craigslist, the searching cost is low.  You may respond that is people cannot tell which information from the landlords is true without the mediation of rental agents.  Renters may end up meeting a bad guy instead of a landlord after seeing a spam. At least rental agents hired by real estate companies are more reliable than some anonymous landlords online. On the other side, landlords are also afraid of dealing with criminals instead of good tenants.  Since background checks are extremely costly in China, it would be more desirable to contract with rental agents and let agents find out the background information for both parties. Compared with internet technologies, human beings have a comparative advantage in identifying fraud and spams. The skills of rental agents in screening landlords and tenants are valuable in a society that lacks trust.

This problem reminds me of a recent paper written by Avner Greif and Guido Tabellini: The Clan and the City: Sustaining Cooperation in China and Europe. The authors argue that  “Thus, the European system has a comparative advantage in supporting impersonal exchange, while the Chinese system has a comparative advantage in economic activities in which personal relations are more efficient.” The reason for such divergence, they believe, is that “In China, clans became the locus of cooperation among kin motivated by limited morality and informal institutions. In Europe, cities became the locus of cooperation among non-kin motivated by generalized morality and formal institutions…The institutional embeddedness of these social groups further reinforced their organizational forms and moralities in multiple ways that our parsimonious model does not capture. These effects persist today.” Whether they are correct or not, at least, I can confirm that in traditional China, middlemen in rental market were almost indispensable . (See this article in Chinese: The Function of Middlemen in Rental Disputes in the Qing Dynasty)

How can we test their hypothesis? Maybe we can use today’s Chinese data to compare regions dominated by powerful clans with regions that have few clans to see if the function of middlemen is similarly important in contractual relations. 

It’s not surprising that China is a low trust society, as the political system of the 1949-76 period was not exactly conducive to building trust.  My wife experienced the system first hand.  The question is whether the lack of trust is a shallow cultural characteristic or a deep characteristic.  Sociologists should be able to solve this sort of question by comparing China to ethnic Chinese economies that never experienced Maoism.  How much corruption is there in Hong Kong, Taiwan and Singapore?  Do people trust Craigslist in those countries? Etc.

Or am I missing something?

The blog is entitled Dao of Economics and covers an interesting range of topics. Recommended to those with an interest in China and or I/O.  Other posts are also worth reading.

Update:  There are actually three contributors to the blog.



7 Responses to “How deep is Chinese distrust?”

  1. Gravatar of Benoit Essiambre Benoit Essiambre
    12. October 2013 at 09:24

    I always thought that trust was an area where the internet and especially social networks could bring benefits with regard to transaction efficiencies as everything becomes connected online.

    If I was to do more graduate studies, I think I would focus on trust metrics and algorithms.

    I hope that some day when I browse for stuff to buy online I can see chains of trusts that reveal for example that a person that has reviewed something is trusted by someone or some organisation I trust and therefore I can trust the review. It would be especially beneficial for larger transactions such as contractors for renovations or it could even apply directly to strangers to device if I can trust them as new employees for example.

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. October 2013 at 15:34

    Regarding the distrust in Chinese rental markets, especially with regard to rental agents; I had the same shock when I moved to NYC in 1975. NYC’s rent control and the perverse incentives of landlord/tenant law made renting an apartment a thousand times more difficult there than anywhere else in the USA.

  3. Gravatar of ssumner ssumner
    12. October 2013 at 15:53

    Benoit, I agree.

    Patrick, Very good point.

  4. Gravatar of mbka mbka
    12. October 2013 at 21:23

    Scott, with respect to your question all the countries you mention are probably influenced by the experience of Maoism, either because their people have fled it, or because they have witnessed it with horror from afar. So it is going to be hard to claim sociological “independence”.

    For Singapore as usual I can only claim anecdotal observations. The level of trust in those spheres of society where order is enforced by government, is very high (the “city” rules) . Popular lore has it that the strong state role in Singapore was indispensable to break the “clans’ ” historical dominance and of course ethnic allegiances. In the now, traditional Chinese clan associations have a social importance comparable to the Rotary club, if at all: voluntary social activities for old men. No one fears them as a societal force, and I have never heard of some clan linked cabal. On the other hand, inter-business, societal trust isn’t very high. There is no loyalty to customers or suppliers. Landlords will walk up to long term tenants and double the rent with no mercy or understanding, just because they can. Those who don’t, are cherished exceptions. And family businesses organize themselves with a clan like web of loyalties. You first give the job to those you know. Importantly, if no one you know can do the job, you may still train some of your network to do the job rather than get it on the market. If you do have to source the job on the open market you always choose the lowest bidder. If a new bidder undercuts your long time supplier by 1 %, you switch supplier. And so on. Basically people have no trust in the market, they trust only the single variable they can observe directly: the price.

    All completely unscientific and based on small sample size observations. Maybe someone with deeper knowledge can chime in and correct me.

  5. Gravatar of dtoh dtoh
    13. October 2013 at 00:44

    Really interesting post. P. Sullivan’s comments about renting in NYC are very to the point. There is a similar problem in Japan which exists because of the strong tenant protection laws. Also landlords frequently need to hire special investigative services to be sure “anti-social elements” (i.e. yakuza) don’t try to rent in a building.

    I tend to think that trust is related to two factors: a) the expectation (or lack thereof) that you will need to conduct business with the counter-party in the future, and b) the availability and execution of fair adjudication services (usually provided by the government). Culture changes depending on whether these factors exist. In some situations, people get into the habit of acting dishonestly, but this can be changed relatively easily if good civil justice becomes available.

  6. Gravatar of ssumner ssumner
    16. October 2013 at 10:03

    mbka and dtoh, Interesting observations. (You two have something in common.)

  7. Gravatar of Bob Bob
    24. October 2013 at 09:40

    Are China’s trust levels any lower than those in Spain or Sicily? We still see the equivalent of clans over there, and the low trust is visible everywhere in life. Major amounts of nepotism, corruption that relies on long lived ties and mutually assured destruction, almost non-existent rental markets. It sure sounds a lot like China but with better environmental regulations. So I am surprised people just want to compare Europe and China, when there’s such a big difference between Norway and Sicily.

    A fast, working court system would probably make a big difference, but I guess that ti’s like the Fed’s capability of devaluing the dollar: If things are going well, it should just be a credible threat, not something you do often. As it is, courts are glacial in comparison with US courts, and justice isn’t blind at all. Just look at what happened in the doping cases of Operation Puerto: Going after all the people involved would damage the image of the country, so instead names are withheld and evidence destroyed.

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