Does Trust Pay Off?

Abstract:     
It is believed that a society's level of trust in strangers, also known as generalized or interpersonal trust, is an accurate reflection of the quality of civil society and of the success of its accompanying economy. Two unresolved issues remain. The first issue concerns the generalizability of previous results obtained using aggregated country or region-level data, when applied to a micro-economical level. The second pertains to the proposed form of the relationship between trust and economic performance, which has most often been regarded to be linear. Using the German Socio-Economic Panel (SOEP), we estimate a two wave (2003, 2008) panel regression and find that the level of trust in strangers, as measured by two statements relating to interpersonal trust, positively influences an individual's economic performance, as measured by annual individual labor earnings. However, we also find significant evidence for diminishing marginal returns between trust and economic performance. We suggest that this latter result is a clear indication of the appropriateness for economic agents of adopting a "trust-but-verify" disposition, roughly equal to the average level of trust in the population, as to achieve the highest economic performance possible. To the best of our knowledge, this is the first time these conclusions have been claimed using micro-level multiple-wave data.

Number of Pages in PDF File: 29

Keywords: trust, social capital, economic performance, income, panel regression

JEL Classification: D31, D71, J31

working papers series