Externalities and the Erosion of Trust

Abstract

We present a theory linking political and social trust to explain trust erosion in modern societies. Individuals disagree on the seriousness of an externality problem, which leads to diverging policy opinions on how to solve it. This heterogeneity has two important effects on trust. First, disappointment with the policy rule enacted by the government breeds institutional distrust. Individuals that are more worried blame the government because the rule is too lenient. The less worried blame it even more because it is too intrusive. Second, as the rule also shapes individuals’ notion of civic behavior, it drives a wedge between what an individual expects from others and their actual behavior. This fuels social distrust. The more individuals are worried, the more they distrust others that are not complying with the rules. Our experimental survey conducted in four European countries shows how these trust dynamics came to the surface during the Covid-19 pandemic. Once led to think intensely about the virus, lower institutional trust was reported predominantly by respondents that were less worried about the virus, whereas social trust declined (more) for worried individuals. We lastly find that support for the welfare state erodes alongside sliding trust levels.

Keywords: social trust, institutional trust, heterogeneity, externalities, regulation, survey experiment, Covid-19, climate change, welfare, taxation

JEL Classification: D700, D720, H300, O520