In a set of cross-country estimates, we find that trust leads to persistently higher levels of economic development. We isolate two main channels through which this effect operates. First, trust affects the quality of economic-judicial institutions, i.e., the rule of law and absence of corruption, which is causally associated with long-run development as Mauro (1995), Acemoglu et al. (2001), or Acemoglu and Johnson (2005) observe. Second, trust also affects the level of education enjoyed by the population, which also contributes to long-run development as Glaeser et al. (2004) report. By identifying both channels, we suggest a way to resolve the debate between Rodrik et al. (2004), who claim that ‘institutions rule’, and Glaeser et al. (2004), who claim that education is important while institutions are not. However, our estimates tend to provide more support for Glaeser et al. (2004), as a relatively larger share of the contribution of social trust on long-run development appears to run through the education mechanism. They also suggest that once its effects through these two channels are taken into account, the long-run economic consequences of trust seem exhausted. In other words, isolating a direct effect of social trust becomes difficult once the two channels are controlled for, unlike what by pioneers of the trust literature such as Putnam (1993) and Fukuyama (1995), suggested. We do not claim that these two main channels are indeed exhaustive of the full effects of social trust, but merely observe that education and property rights institutions appear clearly important and worth considering in further research.Are we moving in circles [circles of trust?]?
HT: Fabio Sabatini.