Is rising inequality related to deteriorating trust?

Abstract: It is generally agreed upon that social trust is strongly associated with income inequality. However, this conclusion is mainly drawn from cross-country studies, which most likely suffer from endogeneity issues due to unobserved cultural, social and political variables affecting both trust and inequality. In this paper we collect trust data from six different surveys and make them comparable through an interpolation method, resulting in a large dataset covering 94 countries over 4 decades. We then use a panel data model with country-fixed effects, controlling for any time-invariant unobserved factors, as well as time-fixed effects, accounting for common year-specific trends. Thereby we approach the isolated marginal effect of inequality on trust. No general relationship between inequality and trust is found. Next, we investigate if there is a heterogeneity in the marginal effect, conditioned on legal system quality, as well as GDP per capita. Amongst countries with relatively bad legal systems, we find that inequality and trust are negatively associated, whilst there seems to be no relationship in countries with relatively good legal systems.