Trust, the Internet, and the digital divide by H. Huang C. Keser J. Leland J. Shachat The Internet is expected to have a positive impact on economic growth, and its adoption rate will determine the extent of this impact. In this paper, we examine how differences in willingness to trust influence Internet adoption rates across countries. We show that trust has a statistically significant influence on levels of Internet penetration across countries. We also show that success in increasing Internet adoption rates through policies to promote trust will depend on a country’s current level of trust, such that differences in trust may produce a digital divide among nations. Since low-trust countries tend to be of low or middle income, this digital divide between countries may translate into a developmental divide. The Internet is expected to be an important source of economic growth in the 21 st century. The Con- gressional Budget Office 1 predicts the U.S. economy will grow at an annual rate of 2.1 percent over the coming decade—an increase of 0.9 percent over U.S. growth for the period 1974 to 1995. Varian et al. 2 estimate that the Internet will account for 48 per- cent of this increase in growth. In a similar vein, Litan and Rivlin 3 discuss research estimating Internet- driven productivity gains in U.S. manufacturing of 0.2 and 0.4 percent per year. Since the Internet dra- matically reduces the cost of transmitting informa- tion, the costs associated with the distribution of goods and services between businesses, between bus- inesses and consumers, and between businesses and their employees are reduced as well, accounting for these expected gains in productivity. Whether predictions regarding the contribution of the Internet to economic growth come to pass de- pends upon whether people and firms choose to adopt the Internet and how fully they embrace the idea of conducting business over it. The degree to which people and firms adopt Web-based activities will depend on how willing they are to accept the greater anonymity and associated possibilities for op- portunism inherent in Web-based transactions. This willingness may, in turn, depend on how much peo- ple trust each other. If trust does influence Internet adoption, it will have an indirect impact on economic growth rates among nations through its influence on the adoption of this growth-enhancing technology. In addition to the possibility of an indirect impact of trust on growth, there is evidence that trust di- rectly impacts economic growth and growth rate dif- ferences across countries. Prior to the late 1990s, eco- nomic growth rates were explained almost exclusively in terms of labor and capital endowments and dif- ferences in how these endowments are augmented by capacities for technological change. Differences in the prosperity of nations or regions relative to oth- ers are, in some cases, difficult to explain in terms of differences in these standard economic variables. During the 1990s, spurred largely by observations and arguments put forth by social theorists like Fukuyama 4 and Putnam et al., 5 economists inves- tigated the possibility that differences in economic Copyright 2003 by International Business Machines Corpora- tion. Copying in printed form for private use is permitted with- out payment of royalty provided that (1) each reproduction is done without alteration and (2) the Journal reference and IBM copy- right notice are included on the first page. The title and abstract, but no other portions, of this paper may be copied or distributed royalty free without further permission by computer-based and other information-service systems. Permission to republish any other portion of this paper must be obtained from the Editor. IBM SYSTEMS JOURNAL, VOL 42, NO 3, 2003 0018-8670/03/$5.00 © 2003 IBM HUANG ET AL. 507