Causal Effect of Income on Trust: Evidence from 2009 Crisis in Russia
Abstract: In this paper, we use a natural experiment to identify a causal relationship between income and trust. We use a panel dataset on Russia where GDP experienced a 8% drop in 2009 (the largest decline in G20). The eff ect of the crisis had been very uneven among Russian regions because of their diff erent industrial structure inherited from the Soviet economy. We find that the regions that specialize in producing capital goods, had a more substantial income decline during the crisis. The variation in the industrial structure therefore allows us create an instrument for the change in income. After instrumenting average regional income we find that the effect of income on trust is statistically and economically significant. Controlling for other conventional determinants of trust, we show that 10 percent decrease in income is associated with 2.6 percentage point decrease in the level of trust (the share of respondents saying that most people can be trusted). Given that the average level of trust in Russia is only 18 per cent, this magnitude is substantial.
