Trust and economic performance

Abstract

Purpose Level of trust among the members is considered to be an important component that contributes towards the economic growth in an economy. The purpose of this paper is to examine the effect of trust level along with income per capita, human capital (education level), investment, labor force and political institutions on the economic performance. Design/methodology/approach In this research, panel data as well as cross-country analysis were applied on a sample of 64 countries from 1980 to 2014. Countries were further divided into developed and developing countries to observe the resultant effect of trust on economic performance. To explain the monotonic relationship between trust and economic performance, a non-linear term of trust is added to the regression model to see the impact of change in trust level on economic performance. Findings Empirical results show that there is a positive relation between social trust and economic performance. The result further describes that investment and human capital are leading determinants of economic performance. To explain the monotonic relationship between trust and economic performance, the study adds non-linear term of trust in regression model. The result explains U-shaped path between trust and economic performance in developing countries and inverse U-shaped path in developed countries. Practical implications The study adds valuable insight to the debate of relationship between trust level and economic performance. Business and managers can use this insight while making international strategic decisions regarding foreign direct investments and international expansions. Originality/value This study highlights the importance of trust in developing and developed countries and shows that trust works as a strong binding in holding societies together and better economic performance is not possible, especially in developing countries where there is a lack of trust.

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