Escape poverty trap with trust? An experimental study

In this study, we introduce an experimental approach to study the causal impact of trust on economic performance. We ask if trust can serve as a coordination device to help poor economies escape a poverty trap and, if so, whether such an impact is universal regardless of their initial levels of development. We follow Lei and Noussair (2002, 2007) and design a decentralized market economy that has the structure of an optimal growth model where output is allocated between consumption and saving over a sequence of periods. As in Lei and Noussair (2007), a threshold externality is introduced to generate two equilibria where the Pareto-inferior equilibrium is considered as a poverty trap. We find that trust matters in that it is more likely for high-trust economies, generated with an endogenous matching procedure, to escape the poverty trap. But we also find that the likelihood to escape depends partially on the initial endowment condition. Trust has a much weaker impact on the economies whose initial capital and output are below the Pareto-inferior equilibrium, suggesting that formal institutions and/or policy measures may be needed to engineer a “big push” for these least developed economies.