Trust and Specialization in Complexity: Evidence from U.S. States

Abstract

In this paper, we show that trust favors specialization in complexity. U.S. states with a high level of generalized trust tend to specialize in industries involving more complex input-output relationships. This pattern is not driven by differences in the states’ other observable characteristics or unobservable time-varying industry- or state-specific factors and does not reflect selection by export destination. Although theoretical considerations suggest that trust may be endogenous to the location of complex industries, an instrumental variable strategy that leverages the impact of racial discrimination confirms that trust is a factor in the specialization of U.S. states in more complex industries.

Keywords: Trust, Specialization, Complexity, Input-Output Relationships

JEL Classification: F10, Z13