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Reassessing the Relationship between Trust and Growth

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  • Roth, Felix

Abstract

This paper analyzes the intertemporal variation of trust on economic growth. Constructing a unique global country panel dataset and applying a system-generalized method of moments (SYSGMM) estimation approach to a sample of 75 market economies over a 40-year time span (1980-2019), this paper finds evidence of a causal curvilinear (inverted U-shape) relationship between trust and growth. This relationship corroborates earlier panel data results but challenges findings that posit a general positive relationship between trust and growth. Only a minority of global economies can attain a position close to or above the optimum threshold for trust and growth. Most economies, in fact, fall well below that threshold, and for them, it is incumbent upon their policymakers to consider trust-building measures in order to achieve higher growth. In countries that are close to the optimum threshold, however, such policies can likely be neglected. In fact, in countries where trust levels exceed the optimum, an increase in trust might even hamper growth.

Suggested Citation

  • Roth, Felix, 2024. "Reassessing the Relationship between Trust and Growth," Hamburg Discussion Papers in International Economics 14, University of Hamburg, Department of Economics.
    • Handle: RePEc:zbw:uhhhdp:14
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    References listed on IDEAS

    as
    1. Niclas Berggren & Mikael Elinder & Henrik Jordahl, 2008. "Trust and growth: a shaky relationship," Empirical Economics, Springer, vol. 35(2), pages 251-274, September.
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    3. Sjoerd Beugelsdijk & Henri L.F. de Groot & Anton B.T.M. van Schaik, 2004. "Trust and economic growth: a robustness analysis," Oxford Economic Papers, Oxford University Press, vol. 56(1), pages 118-134, January.
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    5. Carmen Echebarria & Jose M. Barrutia, 2013. "Limits of Social Capital as a Driver of Innovation: An Empirical Analysis in the Context of European Regions," Regional Studies, Taylor & Francis Journals, vol. 47(7), pages 1001-1017, July.
    6. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    7. Christian Bjørnskov, 2012. "How Does Social Trust Affect Economic Growth?," Southern Economic Journal, John Wiley & Sons, vol. 78(4), pages 1346-1368, April.
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    More about this item

    Keywords

    Trust; Growth; Intertemporal Variation; Panel Analysis; Curvilinear (inverted U-shape) Relationship; Causality;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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