## _wp0742

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---

### I. Introduction — role and definition of trust in IMF programs
- Trust defined as "an expectancy of positive or nonnegative outcomes from which IMF staff and country authorities can benefit based on each other’s expected action."
- Rationale for study:
  - IMF routinely engages with member countries; interpersonal trust’s specific role in program outcomes has not been systematically examined.
  - Trust matters for program design, negotiation, implementation, and monitoring because of the IMF’s reliance on member cooperation.
- Modelling approach (overview):
  - Adapts an outcomes-based model (Bhattacharya, Devinney, and Pillutla (1998)) to IMF–authority relations.
  - Describes a sequential game where IMF staff first provides policy advice and authorities subsequently decide whether to implement it.
  - Key innovation: allows staff and authorities to have different perceptions of program outcomes and of the link between advice and outcomes.
- Core propositions:
  - Trusting relationships tend to improve program design, smooth negotiations, and increase the likelihood of implementation.
  - Distrust can contribute to program failure via several identifiable channels.

### II. Selective literature review — definitions, characteristics, and sources of trust
- Definitions highlighted:
  - Predictability/prediction-based trust (Luhmann, 1979; Zucker, 1986).
  - Goodwill-based trust (Ring and van de Ven, 1992).
  - Expectancy-based definition (Bhattacharya et al., 1998).
  - Mutual altruism perspective (Chami and Fullenkamp, 2002).
- Commonly agreed characteristics:
  - Trust is generally desirable and promotes cooperation.
  - Trust is situation- and person-specific and evolves with experience.
  - Trust implies vulnerability and involves uncertainty and risk.
  - Trust can functionally substitute for power in achieving predictability.
  - Trust is distinct from trustworthiness.
- Sources of trust identified:
  - Institution of relevant procedures (Zucker, 1986).
  - Norms of equity (Van de Ven and Walker, 1984).
  - Successful and repeated transactions (Dasgupta, 1988; Ring and Van De Ven, 1992).
  - Communication processes creating shared meanings (Hardy, Phillips, and Lawrence, 1998).
  - Symbolic signals of reliability (Lewis and Weigert, 1985).

### III. Trust in the context of an IMF-supported program — mechanisms and dependencies
- Working definition applied to IMF programs:
  - Trust = expectancy of positive/nonnegative outcomes from IMF–authorities’ mutual expected actions, in an environment of uncertainty about advice quality and implementation outcomes.
- Program success criterion:
  - IMF engagement considered successful if it "effectively helps reach the objectives of the country’s IMF-supported program" (e.g., restoration of external viability and macroeconomic stability, promotion of growth, reduction of poverty).
  - Strong implementation of staff advice is likely to help, but program success is not determined solely by implementation.
- Dependency map (conceptual):
  - Program Negotiation → Program Design → Program Implementation → Program Monitoring, with Trust affecting and being affected across these stages.
  - Past IMF involvement and program track record influence current trust levels; reputation matters.
- Institutional interactions and procedural steps:
  - Country requests IMF arrangement via a letter of intent (LOI); staff prepares internal briefs/assessments; programs submitted to the IMF Executive Board.
- Factors shaping trust during program design and negotiation:
  - Uncertainty about linkage between staff advice and actual outcomes.
  - Differing ex ante expectations of IMF staff and authorities about advice quality and implementability.
  - Role of IMF and country reputations in shaping implementation decisions.

### IV. Modeling insights and implications (conceptual findings)
- Framework captures:
  - Sequential interaction: staff advises → authorities decide on implementation.
  - Heterogeneous perceptions: staff and authorities may assess expected outcomes differently.
  - Relationship between perceived outcomes, actual outcomes, and trust evolution.
- Qualitative findings:
  - Higher interpersonal trust contributes to:
    - Improved program design.
    - Smoother negotiations.
    - Better implementation track records.
  - Low trust risks:
    - Personality clashes between staff and authorities.
    - High expected or actual costs of negotiation.
    - Provision of IMF Board–unendorsed staff advice complicating authority decisions.
    - Linguistic and communication barriers hindering shared understanding.
- Modeling limits:
  - No comprehensive methodology for measuring trust across all IMF–member relationships.
  - Trust measurement depends on country-specific circumstances and IMF activity type.
  - Does not analyze intra-organizational IMF trust issues.

### V. Identified risks and constraints
- Risks to program success associated with low trust:
  - Personality clashes.
  - High expected or actual negotiation costs.
  - Staff advice not endorsed by the IMF Executive Board.
  - Linguistic barriers and communication failures.
  - Negative feedback from past program failures reducing future trust.
- Constraints on applicability:
  - Results are preliminary; model is a first step.
  - Scope excludes many trust relationships (intra-IMF, other actors) and other IMF activities.

### 1. Trust in IMF staff — determinants
- Origin and timing of staff’s advice:
  - Authorities may distrust advice perceived to originate from pressures by other stakeholders.
  - Timing adequacy is questioned if implementation could produce unfavorable outcomes for the country or authorities.
  - “Sensitive” periods (e.g., run-up to elections) can exacerbate distrust.
- Expected quality of staff’s advice:
  - Authorities form beliefs about advice quality based on past interactions and comparative analyses.
  - Two-way causality: expected quality affects trust and existing trust shapes expectations about quality.
- Handling of sensitive information:
  - Authorities expect IMF to safeguard confidentiality; perceived leaks undermine trust and reduce likelihood of program success.

### 2. Trust in country authorities — determinants
- Perceived commitment to sound program design:
  - Staff’s trust depends on perceived credibility and commitment signaled via response to policy measures, active contribution, and treatment of staff advice elsewhere.
- Response to proposed policy measures:
  - Divergences arise where actions and objectives are not deterministically linked; resistance to key structural conditions can reduce staff trust.
- Contribution to program design:
  - Active involvement and timely, complete information signal credibility; staff’s expectations about information provision are influenced by existing trust.
- Treatment of staff’s advice in other IMF activities:
  - Handling of advice in surveillance and technical assistance informs staff perceptions of likely behavior in program contexts.

### 3. Importance of trust for sound program design
- Trusting relationships foster cooperation and improve program design by:
  - Lowering informational costs: trust reduces information asymmetries by increasing propensity to provide accurate and complete information. 8
  - Two-way causality with country ownership: ownership may enhance trust by reducing IMF accountability for unfavorable outcomes; higher trust increases prospects for country leadership in design and timely implementation. 9
  - Positive impact on performance: interpersonal trust can motivate parties to exert additional effort to meet expectations, improving performance. 10

### 4. Trust and program negotiation — risks and enablers
- Trust-impacting risks during negotiation:
  - Personality clashes and demographic characteristics can generate interpersonal distrust. 11
  - Costs of negotiation: lower trust raises time and effort required and can signal commitment levels. 12
  - Linguistic barriers: limited English fluency and use of interpreters can undermine trust-building.
  - Provision of Board-unendorsed staff advice risks damaging trust if advice is later not Board-endorsed.
- Trust as an enabler:
  - Trust minimizes negotiation costs and risks, increasing probability of successful completion.
  - Trust-inducing factors:
    - Staff’s familiarity with IMF procedures and analytical tools; mastery of macroeconomic analysis; country-specific knowledge.
    - Strong interpersonal and negotiation skills among chief negotiators.

### 5. Trust and program implementation — dynamics and determinants
- Trust-impacting factors during implementation:
  - Prior relationships and past implementation track records inform credibility conjectures.
  - Motivation and form of IMF arrangement:
    - Crisis-resolution programs typically induce greater authority commitment than crisis-prevention programs.
    - Precautionary arrangements can signal readiness to implement advice.
    - Immediate need for IMF resources may reduce incentives to implement once financing needs are addressed.
  - Perceived quality of staff’s advice:
    - Sound advice strengthens trust; flawed advice damages trust; effects are not symmetric.
  - Outcomes and consequences:
    - Authorities’ trust increases with probability of favorable outcomes; staff’s trust may depend on outcomes favorable to the IMF and itself.
    - Mutual positive consequences induce stronger trusting relationships.
  - Relationship between advice quality and implementation outcome:
    - Deterministic link enhances predictability; uncertainty amplifies trust-related issues.
  - Costs of implementation:
    - Larger implementation costs correlate with higher probability of favorable outcomes and signal commitment; higher costs increase reputational stakes for the IMF and staff.

- Role of trust in effective implementation:
  - High trust increases likelihood and timeliness of implementation; distrust correlates with poor implementation records.
  - Trust is not the unique determinant—expected benefits/costs and need for IMF resources matter.
  - Trust also channels through performance: feeling trusted can drive higher effort by staff or authorities.

### Outcomes-based game-theoretic model — structure and insights
- Sequential-action model overview:
  - Stage 1: IMF staff provides preferred or unpreferred advice.
  - Stage 2: Authorities decide to implement or not implement.
- Formal elements preserved from the source:
  - Action profile (a_S, a_C) with S_A = {preferred; unpreferred} and C_A = {implement; not implement}.
  - Outcome x determined jointly and randomly via θ with Pr(x | a_S, a_C) = F_x(a_S, a_C; θ).
  - Perceived outcomes x_i^ε+ and consequence functions U_S(x_S^ε+) and U_C(x_C^ε+).
  - Favorable outcome sets Ω_i = {x ∈ X : U_i(x_i^ε+) > 0}.
  - Trust level T_{i,j} defined as probability that actions yield an outcome favorable to party i, conditional on conjectures about the other party’s actions.
  - Parties form a priori conjectures b_S(.) and b_C(.); staff’s conjectures conditional on its own action b_S(a_C | a_S).
- Behavioral assumptions analyzed:
  1. Parties maximize probability of favorable outcomes (Equations (5)-(8)).
  2. Parties maximize expected utility (Equations (9)-(12)).
- Key conceptual points:
  - Trust estimated is "a priori outcome" trust; after staff moves, trust becomes predictability for that action profile.
  - Trust values lie between 0 and 1; extreme predispositions correspond to blind trust/distrust.
  - Trust is dynamic, must be earned; assuming trust as given can reduce incentives to secure outcomes.
  - Persistent efforts to earn trust are critical for long-term IMF engagement.

### Conclusions and policy implications for the IMF
A. Trust and program success — summary implications
- Strong indications that trust matters for IMF-supported program success.
- Decision to request an IMF program often reflects high trust, though urgent needs can prompt program requests despite low trust.
- Trust-impacting issues emerge during design, negotiation, and implementation stages.
- Recommended IMF actions to secure trust’s positive impact:
  - Exercise caution in setting conditionality and macroeconomic projections; streamline conditionality and actively involve the program country in conditionality design.
  - Emphasize realism of program assumptions and systematic contribution by country authorities to projections.
  - Strengthen staff knowledge of IMF procedures and country circumstances; enhance interpersonal skills of mission teams.
  - Identify and address country-specific factors influencing authorities’ trust and propensity to implement advice.
  - Address risks from low trust (strategic/vindictive behavior, higher transaction costs) and couple trust-maintenance efforts with prudent IMF safeguard policies.

B. Trust-building initiatives in a program context
- Determinants of trust include perceptions of skills/characteristics, outcomes of past arrangements, perceived quality/origin/timing of advice, and IMF outcomes in other countries.
- IMF initiatives presented to build trust:
  - Systematic dissemination of program success stories for cross-country comparisons.
  - Methodical extraction and application of lessons from program failures; leverage the Independent Evaluation Office (IEO) and follow-up on Board-endorsed recommendations.
  - Promote shared meanings and clarify underlying program understandings (oral and written) to reduce information asymmetry; involve Management, Executive Director offices, and Resident Representatives.
  - Systematically present alternative policy options, including homegrown options; use mechanism design with incentives to encourage IMF-preferred options while preserving policy space to strengthen ownership.
  - Increase transparency of IMF interactions to reduce perceptions of weak IMF accountability; pair transparency with measures to strengthen accountability where needed.
  - Recognize hysteresis of trust: trust is self-sustaining but can be damaged quickly; damage increases transaction costs and harms program outcomes.
  - Address factors that can undermine trust: ill-designed advice, overly prescriptive conditionality, high turnover in country teams, perceptions of bias toward nongovernmental/external stakeholders; conduct frequent reviews of conditionality and personnel policies.

C. Issues for further research
- Expand model to include trust impact of program monitoring and past IMF arrangements to capture dynamics across successive programs and reviews.
- Study trust-related issues in other IMF activities (surveillance, technical assistance).
- Investigate intra-organizational trust within the IMF (e.g., between Executive Board, Management, and staff) and its impact on institutional effectiveness.

*Source: Excerpt from the paper contained in _wp0742 - References .............................................................................................................*

### References .............................................................................................................

### _wp0742 - References .............................................................................................................

### I. Introduction — role and definition of trust in IMF programs
- Trust is defined in this paper as "an expectancy of positive or nonnegative outcomes from which IMF staff and country authorities can benefit based on each other’s expected action."
- Rationale for study:
  - The IMF routinely engages with member countries, yet the specific role of interpersonal trust in program outcomes has not been systematically examined.
  - Trust matters for program design, negotiation, implementation, and monitoring because of the IMF’s reliance on member cooperation.
- Modelling approach (overview):
  - Adapts an outcomes-based model (Bhattacharya, Devinney, and Pillutla (1998)) to IMF–authority relations.
  - Describes a sequential game where IMF staff first provides policy advice and authorities subsequently decide whether to implement it.
  - Key innovation: allows staff and authorities to have different perceptions of program outcomes and of the link between advice and outcomes.
- Core propositions:
  - Trusting relationships tend to improve program design, smooth negotiations, and increase the likelihood of implementation.
  - Distrust can contribute to program failure via several identifiable channels.

### II. Selective literature review — definitions, characteristics, and sources of trust
- Definitions highlighted:
  - Predictability/prediction-based trust (Luhmann, 1979; Zucker, 1986): confidence that expectations about behavior will be fulfilled.
  - Goodwill-based trust (Ring and van de Ven, 1992): confidence in another’s goodwill and a preference for cooperation over opportunism.
  - Expectancy-based definition (Bhattacharya et al., 1998): trust as an expectancy of favorable outcomes based on another party’s expected action.
  - Mutual altruism perspective (Chami and Fullenkamp, 2002).
- Commonly agreed characteristics:
  - Trust is generally desirable and promotes cooperation.
  - Trust is situation- and person-specific and evolves with experience.
  - Trust implies vulnerability and involves uncertainty and risk.
  - Trust can functionally substitute for power in achieving predictability, though power and trust have different effects on synergy and dominance.
  - Trust is distinct from trustworthiness; actors may behave trustworthily without actual trust being present.
- Sources of trust identified in the literature:
  - Institution of relevant procedures (Zucker, 1986).
  - Norms of equity (Van de Ven and Walker, 1984).
  - Successful and repeated transactions (Dasgupta, 1988; Ring and Van De Ven, 1992).
  - Communication processes that create shared meanings (Hardy, Phillips, and Lawrence, 1998).
  - Symbolic signals of reliability (Lewis and Weigert, 1985).

### III. Trust in the context of an IMF-supported program — mechanisms and dependencies
- Working definition applied to IMF programs:
  - Trust = expectancy of positive/nonnegative outcomes from IMF–authorities’ mutual expected actions, in an environment of uncertainty about advice quality and implementation outcomes.
- Program success criterion:
  - IMF engagement is considered successful if it "effectively helps reach the objectives of the country’s IMF-supported program" (e.g., restoration of external viability and macroeconomic stability, promotion of growth, reduction of poverty).
  - Strong implementation of staff advice is likely to help, but program success is not determined solely by implementation—objectives can be met even with weak implementation, and vice versa.
- Dependency map (conceptual):
  - Program Negotiation → Program Design → Program Implementation → Program Monitoring, with Trust affecting and being affected across these stages.
  - Past IMF involvement and program track record influence current trust levels; reputation matters.
- Key institutional interactions and procedural steps noted:
  - Country requests IMF arrangement via a letter of intent (LOI), possibly with a memorandum of economic and financial policies and side letters for confidential information.
  - Staff prepares internal briefs/assessments and programs are submitted to the IMF Executive Board for consideration.
- Factors shaping trust during program design and negotiation (examples):
  - Uncertainty about the linkage between staff advice and actual outcomes.
  - Differing ex ante expectations of IMF staff and authorities about advice quality and implementability.
  - The role of IMF and country reputations in shaping implementation decisions.

### IV. Modeling insights and implications (conceptual findings)
- Modeling framework captures:
  - Sequential interaction: staff advises → authorities decide on implementation.
  - Heterogeneous perceptions: staff and authorities may assess the expected outcomes of actions differently.
  - The relationship between perceived outcomes, actual outcomes, and trust evolution.
- Conceptual findings discussed (qualitative):
  - Higher levels of interpersonal trust between IMF staff and authorities contribute to:
    - Improved program design.
    - Smoother negotiation processes.
    - Better program implementation track records.
  - Low trust can generate risks to program success, including:
    - Personality clashes between staff and authorities.
    - High expected or actual costs of negotiation.
    - Provision of IMF Board–unendorsed staff advice complicating authority decisions.
    - Linguistic and communication barriers that hinder shared understanding and cooperation.
- Limits of the modeling exercise explicitly stated:
  - Does not provide a comprehensive methodology for measuring trust across all IMF–member relationships.
  - Trust measurement likely depends on country-specific circumstances and the type of IMF activity (e.g., surveillance and technical assistance may involve different trust dynamics than lending programs).
  - Does not analyze intra-organizational trust issues within the IMF (e.g., among Executive Board, Management, and staff), although these are recognized as important.

### V. Identified risks and constraints (enumerated)
- Risks to program success associated with low trust:
  - Personality clashes.
  - High expected or actual negotiation costs.
  - Staff advice not endorsed by the IMF Executive Board.
  - Linguistic barriers and communication failures.
  - Negative feedback from a history of past program failures reducing future trust.
- Constraints on applicability of findings:
  - Results are preliminary; the model is a first step to quantifying trust’s importance.
  - The scope excludes many trust relationships (intra-IMF, other actors) and other IMF activities where trust plays a role.

*Source: Excerpt from the paper contained in _wp0742 - References .............................................................................................................*

### 1. Trust in IMF staff

### 1. Trust in IMF staff

### Origin and timing of staff’s advice
- The alleged origin of staff’s advice, from the authorities’ perspective, is a key determinant of trust.
- Authorities may distrust staff if they suspect advice stems from pressures by other domestic or external stakeholders, especially if those stakeholders are perceived to benefit primarily from the advice.
- Timing concerns: Authorities will question timing adequacy if they suspect implementation will generate outcomes potentially unfavorable to the program country or themselves.
- “Sensitive” periods (for example, the run-up to elections) can exacerbate distrust if staff’s advice is expected to be associated with negative outcomes.
- If advice has been provided continuously before the “sensitive” period but not followed up by authorities, timing may have less impact on trust.

### Expected quality of staff’s advice
- Authorities form conjectures or beliefs about advice quality during policy formulation; these beliefs affect their trust in IMF staff.
- Expectations about whether staff’s advice will generate favorable outcomes derive from past interactions and comparative analyses of previous staff advice within and outside program contexts.
- There can be two-way causality: expected quality of advice affects trust, and existing trust can shape expectations about advice quality.

### Handling of sensitive information
- Authorities expect the IMF to safeguard confidentiality of information they deem not suitable for public access.
- Belief that sensitive information may leak due to mishandling by IMF personnel undermines trust.
- A leak can reduce the likelihood of program success by both disclosing sensitive information and reducing trust in staff.

*Source: _wp0742 - 1. Trust in IMF staff*

---

### 2. Trust in country authorities

### Perceived commitment to sound program design
- Staff’s trust in authorities is influenced by perceived credibility and strength of the authorities’ commitment to sound program design.
- Credibility can be signaled through: response to staff’s proposed policy measures; actual contribution during program design; treatment of staff’s advice in other IMF activities.

### Response to proposed policy measures
- Staff’s advice is a package of macroeconomic and structural policies deemed appropriate given country circumstances; it may not align with authorities’ homegrown policies.
- Differences of view tend to surface where proposed actions and objectives are not deterministically linked.
- Staff’s trust can be reduced if authorities resist key structural conditions and such resistance is believed motivated by unfounded arguments.

### Contribution to program design
- When interactions are neither power-based nor capacity-constrained, active involvement by authorities signals credible commitment.
- Strongly committed authorities are expected to be actively involved and to provide complete and accurate information in a timely manner.
- Staff’s assessment of authorities’ involvement and propensity to provide full information is a key determinant of staff’s trust.
- This assessment is itself influenced by existing staff trust in authorities (low trust leads staff to expect low propensity to provide full information).

### Treatment of staff’s advice in other IMF activities
- Authorities’ handling of staff’s advice in surveillance and technical assistance is an indicator (imprecise) of likely handling in a program context.
- As staff engages in these activities, it develops perceptions of the authorities’ credibility regarding both program design and implementation, which may influence trust when an IMF arrangement is requested.

*Source: _wp0742 - 1. Trust in IMF staff*

---

### 3. Importance of trust for sound program design
- Trusting relationships foster cooperation and have positive impacts on program design through multiple channels:
  - Lower informational costs: Trust reduces information asymmetries by increasing authorities’ propensity to provide accurate and complete information. 8
  - Two-way causality with country ownership: Ownership may enhance trust by reducing IMF accountability for unfavorable outcomes; higher trust increases prospects for country leadership in design and timely implementation. 9
  - Positive impact on performance: Interpersonal trust can motivate parties to exert additional effort to meet expectations, improving performance. 10

*Source: _wp0742 - 1. Trust in IMF staff*

---

### 4. Trust and program negotiation

### Trust-impacting risks to successful program negotiation
- The paper highlights risks that affect trust between authorities and staff (excluding trust between authorities and IMF Management or intra-organizational IMF trust).
- Examples: gaps between Management and staff during IMF review may undermine authorities’ trust in staff and prompt direct negotiation with Management.

Key risks:
- Personality clashes and demographic characteristics
  - Negotiations involve mission teams and country counterparts both in the field and remotely; interpersonal trust issues may dominate.
  - Personality clashes can generate interpersonal distrust and affect negotiation outcomes.
  - Demographic characteristics (culture, gender, age, ethnic background) can influence willingness to accept trust-related risks. 11
- Costs of program negotiation
  - Trust reduces negotiation costs (time and effort); lower trust makes reaching agreement more difficult and costly. 12
  - Expected negotiation costs can signal the IMF’s commitment to program engagement (from authorities’ perspective) and authorities’ commitment (from staff’s perspective).
- Linguistic barriers
  - English is the IMF’s working language; lack of fluency by authorities can undermine policy dialogue quality and interpersonal trust-building.
  - Use of interpreters reduces scope for direct interpersonal trust-building and may harm trust if interpretation quality is poor.
- Provision of Board-unendorsed staff’s advice
  - Staff’s advice is effectively IMF advice only after endorsement by the Executive Board.
  - Provision of advice inconsistent with Board-approved policies risks damaging trust if such advice proves to be Board-unendorsed.
  - The risk is usually quite low because ad referendum negotiation gives little incentive for Management or the Board to overrule staff; staff can contact headquarters rapidly for guidance.

### Importance of trust for successful program negotiation
- Trust minimizes costs and risks of negotiation, increasing the probability of successful completion.
- Trust promotes cooperation and boosts performance, positively affecting negotiation outcomes and timeliness.
- Trust-inducing factors that help negotiation:
  - Staff’s familiarity with IMF procedures and analytical tools, mastery of macroeconomic analysis, and good knowledge of specific country circumstances to provide customized, Board-consistent advice.
  - Strong individual and interpersonal skills of both staff and authorities—especially chief negotiators with strong communication and negotiation skills—increase chances of successful negotiation.

*Source: _wp0742 - 1. Trust in IMF staff*

---

### 5. Trust and program implementation
- Issues affecting trust can emerge during implementation by influencing expectations of favorable or unfavorable outcomes.
- Such issues affect both parties’ expectancies and can influence the effectiveness of program implementation.

*Source: _wp0742 - 1. Trust in IMF staff*

### 1. Trust-impacting factors during program implementation

### 1. Trust-impacting factors during program implementation

### General overview
- Trust between IMF staff and country authorities can be partly inferred from prior relationships within and outside program contexts; past implementation track records inform conjectures about credibility and commitment.
- Trusting relationships during program implementation are influenced by: the motivation and form of the IMF arrangement requested; the perceived quality of staff’s advice; the outcomes and consequences of implementation; the relationship between advice quality and implementation outcomes; and the estimated costs of program implementation.

### Motivation of the request for, and form of, an IMF arrangement
- The motivation and form of an IMF arrangement can signal the authorities’ readiness to implement staff’s advice in a timely manner.
- Crisis-resolution programs typically induce greater authority commitment than programs aimed at crisis prevention because:
  - a crisis creates urgency;
  - there is an obligation for immediate positive results; and
  - expected relative benefits of successful implementation rise.
- Precautionary arrangements that are not solely catalytic can signal readiness to implement advice, since they are typically made in the absence of immediate balance of payments need.
- Conversely, a country with an immediate need for IMF resources or signaling may have fewer incentives to implement staff’s advice once financing and signaling needs are addressed.

### Perceived quality of staff’s advice
- The authorities’ perception of the quality of staff’s advice directly affects their trust in staff and eagerness to implement the advice.
- If staff’s advice is deemed sound by the authorities, trust is likely to be strengthened and prospects for effective implementation improve.
- If staff’s advice is viewed as flawed, trust tends to be damaged.
- The impact is not necessarily symmetrical: good advice does not strengthen trust in exactly the same manner that flawed advice weakens trust.

### Outcomes and consequences of the implementation of staff’s advice
- Actual and expected outcomes of implementing staff’s advice have major implications for trust.
- From the authorities’ perspective:
  - trust in the IMF and its staff increases with the probability of outcomes deemed favorable to the program country and its authorities;
  - trust is low when the likelihood of favorable outcomes is small.
- From the IMF staff’s perspective:
  - trust in country authorities may depend on how favorable the actual or expected outcomes are to the IMF and itself.
- Stronger trusting relationships are induced by prospects of positive consequences for both parties; relationships deteriorate if implementation leads or is expected to lead to negative consequences.

### Relationship between the quality of staff’s advice and the outcome of its implementation
- Authorities’ trust in IMF staff is influenced by the relationship between perceived advice quality and actual/expected implementation outcomes.
- If the relationship is deterministic, predictability hinges on perceived advice quality.
- If the relationship is characterized by uncertainty (as often in program contexts), trust and distrust issues are prevalent.
- Authorities’ trust is likely to increase if actual or expected outcomes are considered favorable to the country and authorities.
- Staff’s trust in authorities may decrease if actual or expected outcomes are deemed unfavorable from the authorities’ perspective.

### Costs of program implementation
- Estimated and actual costs of implementing staff’s advice (economic, political, or social) are key determinants of trust strength between IMF staff and authorities.
- Larger implementation costs are positively correlated with the probability of obtaining favorable outcomes.
- Acceptance of significant implementation costs by authorities signals their expectancy of, and commitment to achieve, positive outcomes.
- Higher implementation costs increase potential reputational damage to the IMF and its staff in case of failure, intensifying staff’s incentive for program success and reinforcing mutual incentives to ensure success.

*Source: _wp0742 - 1. Trust-impacting factors during program implementation*

### 2. Importance of trust for effective program implementation

### 2. Importance of trust for effective program implementation

### Role of trust in program implementation
- Trust is critical for authorities to decide whether IMF staff’s advice should be implemented; implementation requires expectation of positive outcomes for the program country and its authorities.
- Authorities’ trust in staff builds on:
  - quality of staff’s advice;
  - outcomes, consequences, and costs of implementing that advice;
  - relationship between quality and implementation outcome of staff’s advice.
- High trust in staff increases likelihood of implementation; high distrust tends to correlate with poor implementation records. Implementation can proceed in a distrusted environment but likely at the expense of timeliness.
- Trust is not the unique determinant of implementation; other country-specific considerations matter, including expected benefits and costs of implementation and the need for IMF resources or catalytic role.
- Implementation of specific advice can sometimes result from trust-unrelated interactions among authorities, the IMF, or other stakeholders.
- Trust also channels through performance:
  - Authorities may pursue satisfactory performance to establish a track record of implementing IMF policy advice.
  - At the interpersonal level, feeling trusted can drive higher performance by staff or authorities.

### Outcomes-based game-theoretic model (overview)
- A sequential-action model captures trust-related issues in IMF-supported programs:
  - Stage 1 (design/negotiation): IMF staff moves first by providing preferred or unpreferred advice from the authorities’ perspective.
  - Authorities form perceptions/beliefs about staff’s advice based on past interactions, outcomes of previous recommendations, comparison with homegrown policies, and cross-country experience; authorities can differentiate preferred vs. unpreferred advice.
  - IMF staff is assumed to be aware of authorities’ appreciation of its advice (e.g., via interactions during negotiation).
  - Stage 2 (implementation): Authorities choose to implement or not implement staff’s advice. Choice depends on perceived quality, expected outcomes, and expected benefits/costs (e.g., social or political costs).
  - An unpreferred advice may be implemented if benefits of an active IMF program exceed implementation costs.
- Formal structure (as described):
  - Action profile (a_S, a_C) with action spaces S_A = {preferred; unpreferred} and C_A = {implement; not implement}.
  - Actions jointly but randomly determine actual outcomes x through random function θ; same outcome space X for both parties (e.g., growth, inflation, fiscal balance, current account).
  - Probability of a specific outcome x given actions a_S and a_C is Pr(x | a_S, a_C) = F_x(a_S, a_C; θ) (as in Equation (1) of the source).
  - Parties may have imperfect information about outcomes; perceived outcomes for party i are x_i^ε+.
  - Consequences of outcomes for IMF and program country denoted S_U and C_U; utility-like functions U_S(x_S^ε+) and U_C(x_C^ε+) normalized to take positive (negative) values for perceived favorable (unfavorable) outcomes.
  - Set of perceived outcomes favorable to party i is Ω_i = {x ∈ X : U_i(x_i^ε+) > 0} (Equation (2)).
  - Trust level T_{i,j} is defined as the probability that actions yield an outcome favorable to party i, conditional on conjectures about the other party’s actions.
- Conjectures and timing:
  - Each party has a priori conjectures about the other’s actions: b_S(.) and b_C(.).
  - Because staff moves first, staff’s conjectures are conditional on its own action: b_S(a_C | a_S); authorities’ conjectures depend on staff’s observed action.
- Two behavioral assumptions analyzed:
  1. Parties maximize the probability of favorable outcomes. Trust measures derived in Equations (5)-(8).
  2. Parties maximize expected utility. Expected utilities are given by Equations (9) and (10); trust measured as probability of favorable outcome when each party selects expected-utility-maximizing action (Equations (11) and (12)).
- Key conceptual points from the model:
  - Trust as estimated is "a priori outcome" trust (before first move).
  - Once staff moves, trust becomes predictability for that specific action profile.
  - Trust values lie between 0 (complete distrust) and 1 (complete trust), with blind trust/distrust as predispositions near extremes.
  - Trust is dynamic and must be earned; assuming trust as given can create unwarranted expectations and reduce incentives for staff to secure outcomes in low-trust environments.
  - Persistent efforts to earn trust are critical for successful long-term IMF engagement.

### Conclusions and policy implications for the IMF (summary)
A. Trust and program success
- Strong indications that trust matters for IMF-supported program success.
- Decision to request an IMF program often reflects a high level of trust; urgent needs (e.g., resources, signaling, crisis involvement) can lead countries to seek IMF arrangements despite low trust.
- Trust-impacting issues emerge at stages of design, negotiation, and implementation, affecting likelihood of favorable outcomes and conjectures about actions.
- To secure positive impact of trust on program success, IMF actions recommended include:
  - Exercise caution in setting conditionality and making macroeconomic projections to avoid inducing distrust; streamline conditionality and actively involve the program country in conditionality design.
  - Emphasize realism of program assumptions and systematic contribution by country authorities to projections.
  - Strengthen staff knowledge of IMF procedures and of specific country circumstances; enhance individual and interpersonal skills of mission teams.
  - Identify and address country-specific factors that influence authorities’ trust and propensity to implement advice (quality of advice; outcomes, consequences, and costs; relationship between advice quality and implementation outcome).
  - Address risks from low trust (strategic/vindictive behavior, higher transaction costs), and couple trust-maintenance efforts with prudent IMF safeguard policies.

B. Trust-building initiatives in a program context
- Determinants of trust include perceptions of skills and characteristics, outcomes of past/ongoing arrangements, perceived quality/origin/timing of advice, and IMF outcomes in other countries.
- IMF initiatives to build trust (as presented):
  - Systematic dissemination of program success stories to influence authorities’ conjectures via cross-country comparisons.
  - Methodical extraction and application of lessons from program failures into active arrangements; leverage the Independent Evaluation Office (IEO) and follow-up on Board-endorsed recommendations.
  - Promote shared meanings and clarify underlying program understandings (oral and written) to reduce asymmetry of information and differing interpretations of memoranda of understanding; cooperation over domination and negotiation over imposition; involve IMF Management, Executive Director offices, and Resident Representatives in ensuring shared meanings and nurturing trust. (Footnote reference to IEO, 2004 experience.)
  - Systematically present alternative policy options, including homegrown options, to allow authorities to select options that increase likelihood of favorable outcomes for the country; use mechanism design with appropriate incentives to encourage IMF-preferred options while providing policy space for homegrown choices to strengthen ownership.
  - Increase transparency of IMF interactions with program countries to reduce perceptions of weak IMF accountability and to improve conjectures about IMF work and advice quality; where perceptions of weak accountability are adequate, pair transparency with measures to strengthen accountability and demonstrate staff accountability. The IEO and the IMF’s external relations department in collaboration with area departments have roles to play.
  - Recognize the hysteresis property of trust: trust tends to be self-sustaining but can be damaged quickly; damage produces negative effects on program design, implementation, and transaction costs.
  - Factors that can undermine trust in staff include ill-designed advice, overly prescriptive conditionality, high turnover in country teams, and perceptions of bias toward nongovernmental or external stakeholders; frequent reviews of conditionality and personnel policies can detect and address inadequacies.

C. Issues for further research
- Expand the model to account explicitly for the trust impact of program monitoring and past IMF arrangements to better capture trust dynamics across successive programs and reviews.
- Study trust-related issues in other IMF activities (surveillance, technical assistance) where implications may differ from program contexts.
- Investigate intra-organizational trust within the IMF (e.g., between Executive Board, Management, and staff) and its impact on institutional effectiveness; existing work on IMF governance may be extended to focus specifically on trust issues. (Reference to Santor (2006) and other governance studies noted in the source.)

*Source: _wp0742 - 2. Importance of trust for effective program implementation*

### REFERENCES

### _wp0742 - REFERENCES

### Academic works on trust, organizations, and interorganizational relations
- Alesina, Alberto and Eliana La Ferrara (2000), “The Determinants of Trust,” NBER Working Paper No. 7621.
- Arrow, Kenneth (1972), “Gifts and Exchanges,” Philosophy and Public Affairs, Vol.1, No. 4, pp. 343-362.
- Arrow, Kenneth (1974), The Limits of Organization, W. W. Norton & Company Inc., New York.
- Bhattacharya, Devinney, and Pillutla (1998), “A Formal Model of Trust Based on Outcomes,” The Academy of Management Review, Vol.23, No.3. (July 1998), pp. 459-472.
- Bohnet, Iris and Kessely Hong (2004), “Status and Distrust: The Relevance of Inequality and Betrayal Aversion,” Harvard PON Working Paper.
- Carter, Jonathan and Ali A. Ghorbani (2002), “Towards a Formalization of Trust,” University of New Brunswick.
- Dasgupta, Partha (1988), “Trust as a Commodity”, in Gambetta, Diego (Ed.) Trust: Making and Breaking Cooperative Relations, University of Oxford, pp. 49-72.
- Gambetta, Diego (2000), “Can We Trust Trust?” In Gambetta, Diego (Ed.) Trust: Making and Breaking Cooperative Relations, University of Oxford, Chapter 13, pp. 213-237.
- Hardy, Cynthia, Nelson Phillips, and Tom Lawrence (1998), “Distinguishing Trust and Power in Interorganizational Relations. Forms and Facades of Trust,” In: Christel Lane and Reinhard Bachmann (Eds.), Trust within and between Organizations. Conceptual Issues and Empirical Applications, New York, p. 64-87.
- La Porta, Rafael; Florencio Lopez-de-Silanes; Andrei Shleifer; and Robert Vishny (1997), “Trust in Large Organizations,” The American Economic Review, Vol. 87, No. 2, Papers and Proceedings of the Hundred and Fourth Annual Meeting of the American Economic Association, pp.333-338.
- Lewicki, Roy J. and Barbara Benedict Bunker (1995) “Trust in Relationships: A Model of Development and Decline.” In Conflict, Cooperation and Justice: Essays Inspired by the Work of Morton Deutsch, Eds. Barbara Benedict Bunker and Jeffery Z. Rubin. San Francisco: Jossey-Bass, pp 133-174.
- Lewis, J. David and Andrew Weigert (1985), “Trust as a Social Reality,” Social Forces, Vol. 63, No. 4, pp. 967-85.
- Luhmann, Niklas (1979), Trust and Power, New York: Wiley.
- Luhmann, Niklas (2000), “Familiarity, Confidence, Trust: Problems and Alternatives,” in Gambetta, Diego (ed.) Trust: Making and Breaking Cooperative Relations, University of Oxford, Chapter 13, pp. 213-237.
- Ring, Peter S., and Andrew H. Van De Ven (1992), “Structuring Cooperative Relationships Between Organizations,” Strategic Management Journal, Vol. 13, pp. 483-498.
- Sabel, Charles F. (1993), “Studied Trust: Building New Forms of Co-operation in a Volatile Economy,” In Richard Swedberg (Eds.), Explorations in Economic Sociology, New York Russel, pp. 104-44.
- Van de Ven, Andrew H. and Gordon Walker (1984), “The Dynamics of Interorganizational Coordination,” Administrative Science Quarterly, Vol. 29, pp. 598-621.
- Zaheer, Akbar; McEvily, Bill; and Vincenzo Perrone (1998), “Does Trust Matter? Exploring the Effects on Interorganizational and Interpersonal Trust on Performance,” Organization Science, Vol.9, No. 2, pp. 141-159.
- Zucker, L. G. (1986), “Production of Trust: Institutional Sources of Economic Structure”, In B.M. Staw and L.L. Cummings (Eds.), Research in Organizational Behavior, pp. 53-112.

### Negotiation, governance, and corporate practice
- Fisher, Roger (1991), “Beyond Yes”, Harvard Program on Negotiation, Cambridge, Massachusetts.
- Chami, Ralph and Connel Fullenkamp (2002), “Trust as a Means of Improving Corporate Governance and Efficiency”, IMF Working Paper WP/02/33, Washington, February 2002.
- Santor, Eric (2006), “Governance and the IMF: Does the Fund Follow Corporate Best Practice?” Bank of Canada Working Paper 2006-32.
- Mirakhor, Abbas (2005), “Globalization and Islamic Finance”, Paper Presented in the Sixth International Conference on Islamic Economics and Finance, Jakarta, Indonesia, November 21—24, 2005.

### IMF evaluations, reviews, and policy documents
- Independent Evaluation Office (2004), “Evaluation of the IMF’s Role in Poverty Reduction Strategy Papers and the Poverty Reduction and Growth Facility”, Washington, July 2004.
- International Monetary Fund (2004), “Policy Formulation, Analytical Frameworks, and Program Design,” Washington, November 2004.
- International Monetary Fund (2004), “Fund-Supported Programs—Objectives and Outcomes,” Washington, November 2004.
- International Monetary Fund (2006), “Review of Ex Post Assessments and Issues Relating to the Policy on Longer-Term Program Engagement,” Washington, March 2006.

*Source: _wp0742 - REFERENCES*

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