15 Nov 2007  Working Papers

The Dynamic Interplay of Inequality and Trust: An Experimental Study

Executive Summary — Trust makes economic agents more willing to engage in interactions involving the risk of being deceived. Like a lubricant, trust may positively influence efficiency and economic growth, and at the same time affect the distribution of wealth within an economy. However, trust is difficult to measure on both the microeconomic and the macroeconomic level. Survey data frequently discover individual attitudes toward trust, but cannot easily identify to what extent such self-reported attitudes reflect economic behavior, and how trust interacts with the dynamics of efficiency and distribution. This paper complements empirical and survey literature on the relationship between inequality and trust with the help of experimental games, which systematically investigate the dynamic interplay of trust, efficiency, and distribution. Key concepts include:

  • In an experimental economy that started with equal endowments, trust was relatively prevalent at the beginning, maybe due to low social distance as measured by initial wealth comparisons.
  • With increasing inequality, subjects started to condition their behavior on the opponent's wealth. Consequently, trust rates went down, and growth was attenuated.
  • In an experimental economy that started with unequal endowments, trust levels remained stable, allowing for considerable efficiency gains.
  • Results suggest that there might also be value in studying the dynamics of inequality within countries, as well as the interaction of trust and procedural or jurisdictional fairness perceptions.

 

Author Abstract

We study the interplay of inequality and trust in a dynamic game, where trust increases efficiency and thus allows higher growth of the experimental economy in the future. We find that trust is initially high in a treatment starting with equal endowments, but decreases over time. In a treatment with unequal endowments, trust is initially lower yet remains relatively stable. The difference seems partly due to the fact that equal start positions increase subjects' inclination to condition their trust decisions on wealth comparisons, whereas conditional trust is much less prevalent with unequal initial endowments. As a result, with respect to efficiency, the initially more unequal economy fares worse in the short run but better in the long run, and the disparity of wealth distributions across economies mitigates over time.

Paper Information