Does Trust Matter: the Role of Institutional and Interpersonal Trust in Economic Growth and Development

This paper examines the impact of trust on economic development and growth and finds it significant. For this purpose, the three types of trust are distinguished: generalized, interpersonal and institutional ones. The data were collected on 89 countries for the period of 2005-2014 years. The initial model used is of Tabellini (2010). After checking the initial model with the newly gathered data, trust was decomposed into the three types and generalized and institutional trust indexes were found statistically significant. Afterwards, institutional and interpersonal trust dummies were introduced to control the effect of low institutional trust level together with high level of interpersonal trust. Finally, economic factors of development were included. The research results in finding institutional trust being significant, contributing to economic growth when high, and preventing it when low. As mostly personal trust is significant in case of economic development as a dependent variable, and only institutional trust is significant in case of economic growth, it is possible to conclude that personal trust is important for the level rather than for the pace of development. Institutional trust is mostly responsible for pace, though can contribute to both. The results are robust to the reverse causality problem as the usage of lagged trust and other cultural variables brings the same results as stated above. The results of this research allow making a suggestion that the variation in the level of various types of trust explains the difference in the levels of development and growth of several countries given the same economic incentives. The limitations of this research suggest the possibility of further investigation. The main problem is the lack of data on different types of trust. So, more countries should be included in the surveys. Another suggestion is to unify the survey questions in order to make different data on trust comparable and decrease the possible bias.