Is rising inequality related to deteriorating trust?

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: It is generally agreed upon that social trust is strongly associated with in- come inequality. However, this conclusion is mainly drawn from cross-country studies, which most likely suer from endogeneity issues due to unobserved cultural, social and political variables aecting both trust and inequality. In this paper we collect trust data from six dierent surveys and make them com- parable through an interpolation method, resulting in a large dataset covering 94 countries over 4 decades. We then use a panel data model with country- xed effects, controlling for any time-invariant unobserved factors, as well as time-xed effects, accounting for common year-specic trends. Thereby we approach the isolated marginal eect of inequality on trust. No general rela- tionship 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 nd that inequality and trust are negatively associated, whilst there seems to be no relationship in countries with relatively good legal systems.

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