Why Fixing Trust Issues Might Help You Grow
- Vidhi Sikarwar
- Dec 23, 2025
- 7 min read
Writer: Vidhi Sikarwar
Editor: Samarveer Singh
Introduction
If you’re an Ashokan (especially one who frequents the library), there’s a good chance you’ve left your valuables — laptop, phone, headphones, charger, or something else — unattended somewhere on campus. You have faith that no one will touch your stuff.
But the moment you step outside the gates and onto public transport, that faith evaporates. Your backpack is now in front of you, and you’re checking your pockets every five minutes. Anyone who’s ever set foot in Delhi will tell you that leaving your belongings unattended in public is a bad idea. In contrast, in Japan, it’s common for people to leave their personal items, especially their phones, on restaurant tables to reserve a seat.
People in Japan have more trust in their society than we Indians do in ours. But beyond being a pleasant social trait and a need for civic cooperation, does interpersonal trust offer any economic value?
Our Word in Data took data for interpersonal trust levels from the World Values Survey and graphed it against GDP per capita for a number of countries. Here, trust has been measured as the share of respondents who agree that “Most people can be trusted”.
Clearly, there is a strong positive correlation between interpersonal trust and GDP per capita. But is this relationship at all causal? And if so, in which direction and to what extent?
This article explores both the conceptual and empirical work of different economists to understand why trust may have a causal relationship with growth, and the limits of unpacking this relationship.
Exploring the Relationship
The correlation graph in the previous figure shows the relationship between Trust and GDP over a cross-section. What about the relationship between Trust and GDP over time for a country?
When considering overtime trends specific to countries, there are inconsistencies in this relationship. For example, for Bangladesh, Argentina, Ethiopia, and India, the rise in GDP per capita over time has been accompanied by a decline in trust. Meanwhile, for Switzerland, the United Kingdom, Japan, and Italy, the rise in GDP per capita has been accompanied by a rise in trust levels. Since the countries in the latter list are all upper-income countries, as opposed to the previous list, is it the case that the initial level of GDP per capita determines the effect of trust, with higher initial GDP increasing the effect of trust on GDP? That would imply some sort of nonlinear relationship between the two. However, this still does not explain the time trend in countries like the United States, where even for a high-income country, a rise in GDP has been accompanied by a fall in trust levels.
Regardless, curious to see the time trend of trust versus GDP per capita, I ran a rough exploratory regression of ln(GDP per capita) on Trust and Trust², controlling for country-level fixed effects with robust standard errors.
In layman's terms, I tried to estimate the effect of trust on GDP over time, assuming a quadratic relationship.
A Note on Methodology: Crucially, this regression was conducted purely for illustrative purposes to visualise the potential shape of the relationship and is not intended as a rigorous finding. I have not performed any robustness checks (e.g., tests for endogeneity, omitted variable bias, or causality), and thus the resulting coefficients and their implications are likely unreliable and should not be taken as an established economic result.
The resulting estimated equation looked something like this:
ln (GDP per capita) = 0.00045*Trust² - 0.0319*Trust + 10.33
This rough regression, intended purely for illustration, suggests that the relationship between changes in trust and changes in the log of GDP per capita could be non-linear, following a U-shaped correlation over time.
What this regression does conclusively show is that, on average, there is some positive correlation between Trust and GDP over time as well.
Mechanisms
In the Annual Review of Economics 2013, Yann Algan and Pierre Cahuc from the Department of Economics, Sciences Po, document research on trust and conclude that “several recent papers find a strong impact of trust on GDP per capita”. So there is quite some evidence that the relationship is causal, and this does not seem unintuitive.
There are many mechanisms through which trust can causally affect economic growth. Almost every transaction is made on the basis of trust. Low levels of trust can increase transaction costs due to additional steps and precautions surrounding each transaction. With higher trust, employers don’t need to worry about spending as much effort and money monitoring their employees, increasing opportunities for remote work and more flexible hours. Institutional trust can lead to increased business fixed investments due to faith in the regulatory environment. On the other hand, low levels of trust can also discourage investments in public goods and infrastructure. If the people lack trust in the government, and so their ability to effectively utilise the people’s investments, investment rates will naturally be low. Increased trust is also key to financial market development. If households’ trust in banks and financial institutions increases, it would lead to more efficient management of savings. Moreover, it would open up the credit market to a greater share of the population by making credit more accessible and cheaper.
Trust and TFP
Diane Coyle and Saite Lu from Cambridge in their paper argue that Total Factor Productivity (TFP) growth could be the channel linking trust to economic growth. They test the role of trust as an enabling asset to increase total factor productivity growth (while controlling for a number of other variables).
The paper uses economist Partha Dasgupta’s model of the relationship between trust and productivity, which in essence captures that logic that “An economy with higher social capital might be expected to use resources more efficiently, due to reduced free riding, lower transactions costs and lower costs of monitoring and contract enforcement, and thus generate more income and wealth”.
The paper runs both a cross-sectional and panel regression of TFP on trust and finds a significantly positive association of trust with TFP growth (for a sample of 23 EU countries from 2000-2016).
Problem of Simultaneity
It is important to note that there is a problem of reverse causality when looking at the relationship between trust and GDP. Just as higher levels of interpersonal trust lead to GDP per capita growth, a rise in GDP per capita can also be responsible for increased levels of trust.
Higher income allows the government to fund and improve the quality of formal institutions. This makes the enforcement of laws and regulations stronger, leading to greater institutional trust, which spills over into increased interpersonal trust. Some studies also suggest that economic growth can lead to a more transparent and less corrupt government. Moreover, economic growth allows the state to provide better quality public goods, such as unemployment benefits, healthcare, and education, that create better social safety nets. All these factors together increase the public’s trust in the government. With higher GDP per capita, people are more financially secure and so are less often faced with the problem of scarcity or poverty. Due to this increase in the ability to sustain household needs along with reduced competition over limited resources, there is lower risk of being cheated or exploited. Moreover, a reduction in poverty also reduces crime rates, and all these forces together foster higher social trust. Therefore, trust and GDP both affect each other positively, making it difficult to factor out the effect of one on the other.
Conclusion
Trust is easy to take for granted in small, protected environments (like a university library) and often useful to abandon in larger, anonymous ones. Yet the cross-country evidence suggests that this retreat from trust may carry real economic costs. Across countries, higher interpersonal trust is strongly correlated with higher GDP per capita, and while time-series patterns are more mixed, both illustrative regressions and existing empirical work point to a meaningful association between trust and long-run economic performance.
The conceptual mechanisms help explain why this relationship is plausible. Trust lowers transaction and monitoring costs, facilitates investment, enables financial market development, and improves the efficiency with which labour and capital are used. Empirical work linking trust to Total Factor Productivity reinforces this channel, suggesting that trust operates less as a direct input and more as an enabling form of social capital, allowing economies to do more with the resources they already have. At the same time, the relationship is neither simple nor one-directional. Trust cannot be increased through policy in isolation, nor can its effects be cleanly separated from income, institutions, or historical context.
Economic growth itself can strengthen formal institutions, reduce insecurity, and lower incentives for opportunistic behaviour, thereby feeding back into higher trust. These dynamics cause simultaneity to create feedback loops that complicate causal inference but also underscore how tightly trust and growth are intertwined. Taken together, the evidence suggests that fostering trust is less about nudging individuals to be more trusting and more about building credible institutions, predictable enforcement, and social environments in which trust becomes the rational choice. In that sense, improving trust is not merely a question of civic harmony or personal comfort, but also of reducing frictions across the entire economy. If economic growth is ultimately about producing more with the same resources, trust may be one of the most understated, yet fundamental, forms of economic capital we possess.
So maybe the next time you leave your charger on a library desk without worrying, you can tell yourself that you are, in your own way, contributing to economic growth.
(Although, if your charger does get stolen, this article is not to blame.)
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