Interpersonal Trust as Individual Choice With Social Interactions

People are shown to be “more (less) trusting as others are on average more (less) trusting” in a binary-choice-with-social-interactions model that is estimated using cross-section data from more than sixty countries, with mean trust as an explanatory variable. These endogenous effects explain local conformity in trust decisions; and they explain global diversity as high, medium and low trust equilibria in various countries. A monotonicity condition that makes the existence of multiple equilibria, which could only be caused by strong endogenous interactions effects, both necessary and sufficient for the ‘pattern reversals’ evident in the data, identifies endogenous social interactions. Medium trust is unstable, implying that good formal institutions might prevent the collapse of trust in medium trust economies (e.g., the US, UK, Germany); but merely revamping formal institutions may not help countries caught in low trust traps