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Bergh, A., Bjørnskov, C. (2014). Trust, welfare states and income equality: Sorting out the causality. European Journal of Political Economy 35: 183-199.

The cross-country correlation between social trust and income equality is well documented, but few studies examine the direction of causality. Reviewing the literature and using a prisoner's dilemma that allows payoff inequality, we show that under plausible circumstances, trust aids the creation of welfare states, which reduces inequality. Trust may also directly affect the income distribution. Using a structural equations model estimated with data for 104 countries, we confirm three hypotheses: 1) Trust has a direct positive effect on gross and net income equality; 2) Larger welfare states lead to higher net equality; and 3) Neither net income equality nor welfare state size causally affect trust, but gross inequality negatively affects trust. We conclude that while welfare states reduce net inequality, this will not increase trust.

Authors

Bjørnskov, Christian

Christian Bjørnskov is Associate Professor at the Department of Economics and Business of the Aarhus University, where he teaches International Economics. His main research interests are Social capital, International trade and Development Economics. Official Site

Bergh, Andreas

Andreas Bergh is associate professor at the department of economics at Lund university, and has previously been a research fellow at the Ratio institute and a visiting scholar at Harvard university. His research includes welfare state economics and institutional economics. Among the questions...

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