Mathematical Models Construct a Relationship Function - Management Assignment Help

Assignment Task

Task
Q1?Conditional on other characteristics, there is a positive correlation between trust (as measured in the World Values Survey) and per capita income. This could be because higher trust leads to higher income, or because higher income leads to higher trust. Which of these two explanations is likely to be more important?
Background
The explanation 'higher trust leads to higher income' is likely to be more important.
There are countless discussions on the relationship between trust and per capita income, mainly through mathematical models that construct a relationship function, then quantify the analysis to obtain an accurate impact coefficient by using instrumental variables to address endogeneity. Algan & Cahuc (2010) draw on the inheritance of trust and use data on the trust of immigrants in the United States as an instrumental variable for trust in the country of origin, deriving the positive effect of trust on the per capita income. Brückner et al (2019) relied on the effect of oil prices on income and used oil prices as an instrumental variable for national income, deriving a positive relationship on trust for residents in Russia.
Comparison: from theory to reality
It is difficult to compare which explanation is more significant through mathematical models, because it is difficult to find a study that uses the same object, scope, and data to examine the interrelationship between the two variables separately. Perhaps it is time to move away from reliance on mathematical and theoretical models and compare the practical significance of the two explanations. This essay will analyse the importance of the two positive relationships for national development from the perspective of policymakers.
2.1 Trust is process, income is outcome
Das Kapital shows that the economic base determines the superstructure (Marx and Engels, 1989). The rise in per capita income is an essential indicator of economic development. In most countries today, economic indicators have been used as the fundamental basis for measuring national development. The government’s policies and reforms cannot be separated from economic development itself and ultimately serve the economy. As a result, the economic dimension becomes even more critical. When discussing the relationship between trust and income, the interpretation of income per capita as an outcome has more economic significance and more in line with policymakers' considerations.
2.2 Evidence of trust-driven economy policy
The promotion of higher per capita income through increased trust is a widespread phenomenon in reality. The Wealth of Nations theory states that state capital is the sum of individual incomes (Smith, 1825). If the individual is one of the driving forces of economic development, then trust is the glue that holds these forces together. From the perspective of policymakers, policies aimed at trust-driven economic development can be seen from different dimensions. The US government encourages the development of a trust-based peer-to-peer digital branding strategy that ties product satisfaction and trust together, promotes trust between service providers and consumers, breaks through the boundaries of commodity circulation, and ensures fairness and security of transactions, thereby enhancing brand value and driving consumption (Ozbal, 2020). China promotes mutual trust among enterprises by urging them to operate with integrity through a corporate credit rating system, which reduces their transaction risks and costs, and also facilitates the formation of virtual capital based on integrity to acquire the economic value (Chai, et al., 2019). By establishing cooperative banks, the Netherlands strengthens cooperation and trust between banks to ensure their smooth operation and maintain the stable development of the financial market (Karafolas, 2016). The use of national credit ratings also provides credit for trade between countries (Bergen, 2014). When making policies, policymakers will more often use trust as an intermediate variable for economic development and per capita income, trust-building is the process, and economic development is the purpose. The policies based on the starting point of a trust-driven economy has more crucial practical significance with raising people's living standards.

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