Trusting individuals versus trusting institutions: Generalizing the case of contract

Hume is right: assuming the good will be good regardless, 'institutions designed for knaves' will unambiguously increase contract compliance. But what if the establishment of public enforcement institutions undermines private virtue? Using a deliberately stylized model, this article traces several scenarios in which demoralization might occur. The aim is to calibrate the tolerances of the trust system, showing just how bad that demoralization would have to be before we would be better off simply trusting private individuals to honor their contracts autonomously rather than commissioning public institutions to enforce them.