A vast literature has investigated the relationship between trust and aggregate economic performance. We investigate the relationship between individual trust and individual economic performance. We .nd that individual income is hump-shaped in a measure of intensity of trust beliefs available in the European Social Survey. We show that heterogeneity of trust beliefs in the population, coupled with the tendency of individuals to extrapolate beliefs about others from their own level of trustworthiness, could generate the non-monotonic relationship between trust and income. Highly trustworthy individuals think others are like them and tend to form beliefs that are too optimistic, causing them to assume too much social risk, to be cheated more often and ultimately perform less well than those who happen to have a trustworthiness level close to the mean of the population. On the other hand, the low-trustworthiness types form beliefs that are too conservative and thereby avoid being cheated, but give up prfitable opportunities too often and, consequently, underperform. Our estimates imply that the cost of either excessive or too little trust is comparable to the income lost by foregoing college. Furthermore, we find that people who trust more are cheated more often by banks as well as when purchasing goods second hand, when relying on the services of a plumber or a mechanic and when buying food. We complement the survey evidence with experimental evidence showing that own trustworthiness and expectations of others' trustworthiness in a trust game are strongly correlated and that performance in the game is hump-shaped.
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Paper provided by European University Institute in its series Economics Working Papers with number
ECO2009/33.
Length: Date of creation: 2009 Date of revision: Handle: RePEc:eui:euiwps:eco2009/33
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Jeffrey Butler & Paola Giuliano & Luigi Guiso, 2009.
"The Right Amount of Trust,"
NBER Working Papers
15344, National Bureau of Economic Research, Inc.
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Find related papers by JEL classification: A1 - General Economics and Teaching - - General Economics A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines D1 - Microeconomics - - Household Behavior O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration Z1 - Other Special Topics - - Cultural Economics
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Edward L. Glaeser & David I. Laibson & José A. Scheinkman & Christine L. Soutter, 2000.
"Measuring Trust,"
The Quarterly Journal of Economics,
MIT Press, vol. 115(3), pages 811-846, August.
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