1 Department of Economics and Business Economics, Aarhus BSS, Aarhus University2 Department of Economics and Business Economics - The Tuborg Research Centre for Globalisation and Firms, Department of Economics and Business Economics, Aarhus BSS, Aarhus University3 Lund University4 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
Sorting out the Causality
The cross-country correlation between social trust and income equality is well documented, but few studies examine the direction of causality. We show theoretically that by facilitating cooperation, trust may lead to more equal outcomes, while the feedback from inequality to trust is ambiguous. Using a structural equation model estimated on a large country sample, we find that trust has a positive effect on both market and net income equality. Larger welfare states lead to higher net equality but neither net income equality nor welfare state size seems to have a causal effect on trust. We conclude that while trust facilitates welfare state policies that may reduce net inequality, this decrease in inequality does not increase trust.
European Journal of Political Economy, 2014, Vol 35, p. 183-199