Trust and Total Factor Productivity: What Do We Know About Effect Size and Causal Pathways?

This article explores what is known about the relationship between trust and total factor productivity (TFP). Generalized interpersonal trust is widely considered the best summary measure for social capital, and if this is the case the impact of trust should be reflected in estimates of TFP. A systematic review of the literature on trust, incomes, growth, and TFP finds relatively few articles on the latter despite a developed literature on trust, income, and growth. Using a development accounting framework, a simple model of the relationship between trust and TFP is set out and the size of the impact of trust on TFP is estimated empirically using a cross-country panel dataset based on the European Social Survey (ESS). Despite the limitations of the ESS, estimates of the magnitude of the impact of trust on TFP are broadly similar to those from the only other similar study identified (Bjornskov and Meon, 2015), which is based on the World Values Survey. A counterfactual estimate of TFP is used to illustrate the magnitude of the effect of trust on TFP, highlighting that the impact of trust is non-trivial in real terms, even for high-trust countries.