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