The trust paradox

Francesco Sarracino and Giulia Slater

MPRA Paper from University Library of Munich, Germany

Abstract: Countries where interpersonal trust is higher have, on average, higher gross domestic product (GDP) per capita. Does this mean that economic growth is associated to growing trust over time? We review the literature addressing this question, and provide updated empirical evidence on the effects of economic growth on trust over time, a well-established measure of social capital, widely considered in economic studies. We use country panel data from the Penn World Tables and information on people trusting others from the Survey Data Recycling (SDR) v.2.0 database, the largest source of data on trust currently available. Results confirm the positive cross-sectional relation found in previous studies. However, over time trust decreases when GDP grows. A number of robustness checks and a test of causality support this conclusion. The negative relationship between economic growth and trust over time affects prevalently unequal, rich countries. This is possible because growing income inequality increases the chances for social comparisons, which substitute trust in individuals’ utility functions. Additionally, income inequality hampers cooperation and cohesiveness in favour of competition, and increases the probability of social unrest. This suggests that the quality of growth matters: interpersonal trust decreases when economic growth is accompanied by income inequalities.

Keywords: trust; economic growth; panel data; paradox; inequality (search for similar items in EconPapers)
JEL-codes: I38 O15 O40 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-gro, nep-soc and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:120053

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