Societal Trust and Economic Growth

Trust is one of the most important preconditions for any society to develop. Existing trust between individuals and societal trust diffusing through societal mechanisms of interaction enhance economic exchange. Although the fact of widespread trust enhancing economic growth is undisputed in social sciences, this work for the first time tries to comprehensively and rigorously cover this causal relation from trust to economic growth. The analysis in this text is two-fold. Firstly, the incorporation of a formal model of trust and societal trust into the standard framework of modern growth theory shows its effects on long term economic development. It indicates that spillover of reputation of trustworthiness from individuals to other individuals and to different levels in society are essential for ensuring cooperation between strangers. These societal spillover of trust and trustworthiness are important for economic growth, because they ‘generalise’ trust originated from and bound to individuals forming local trust networks. Additionally, a rigorous empirical analysis shows that trust and societal trust can indeed be made empirically responsible for diverging patterns of economic growth among countries and regions.