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Trust and Inequality as Economic Influences

This involves studying the interplay between trust and inequality in a dynamic game. In this case, efficiency is increased by trust, which allows a higher experimental growth of an economy. The study is set to find out how the relationship between inequality and trust affects economic growth. In this study, trust is found to be high in the treatment that begins with separate endowments. However, it tends to reduce over time. In situations where the treatment involves unequal endowments, trust tends to be low initially but gains stability as time goes by.

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Literature Review

There exist a number of theoretical literature that addresses the interplay of prosperity as well as the growth of an economy. The discussion of this content began in the 1950s, courtesy of the Kuznets – Curves. These curves proposed a relationship between the development of an economy and inequality, in the form of a ‘U’ that is inverted (Kuznets, 1955). The curves have been predominantly assumed, particularly in the most recent times. Many researchers argue that the relationship that lingers between growth and inequality is definitely negative. The Galor and Zeira’s (1993) model can be used as an example of theoretical literature for this study. The other examples of theoretical literature for this study include those of Tabellini and Person (1994), Glaesar (2005), as well as the survey of different literature strains by Ros (2000).

An overview of a range of empirical studies has been presented by Benabou (1996). The empirical literature provides a negative link between the differences in income disparities, in different societies from developing and developed nations. Many scholars agree that trust is important in gaining an understanding of non-positive relationships that exist between societies’ prosperity and inequality. In addition, there is no difference in the way the scholars approach this issue. Inequality appears to reduce trustworthiness and trust levels within a society. This in turn affects growth negatively. Zak and Knack (2001) and Keefer and Knack (1997) provide empirical evidence for this argument. They found out that nations with a higher dispersion of income exhibit significantly low values for the measure of trust (Corneo & Gruner, 2000; Corneo & Jeanne, 2001). The World Value Surveys (WVS) helped derive the trust measure, while the Gini coefficient for income measured the income dispersion.

On the same note, a negative connection exists between trust behavior and social distance (Alesina & Ferrara, 2002), in a certain study that was restricted within the United States. Moreover, certain empirical studies came up with a positive impact on the trust that is generalized on developing an economy (La Porta, Lopez-de-Silanes, Shleifer & Vishny 1997; Zak & Knack, 2001; Knack & Keefer, 1997). However, Durlauf (2002) noticed the availability of a range of problems of identification, including causality in several of the presented empirical studies. This was achieved after he surveyed the relationships that exist in trust, social capital, and economic indexes. Therefore, it is suggested that laboratory experiments to evaluate the possible causes of these structures are indispensable. The experiment results obtained are crucial in developing or building models of individual behavior. This helps to explain the relationship that exists between the aggregate measures of economic and social capital (Glaeser, Laibson & Sacerdote, 2002).

Conclusion on Research Question

From the review of literature, it is evident that trust plays an important role in the payoff of prosperity and inequality. On the other hand, experimental methodology impacts on the social distance in society. Endowments of trustees sometimes vary and hence does not seem to have any impact on trust (Glaesar, 2005). It can be noticed that unequal show-up distribution fees were employed within a trust game. In this case, the authors seem to be observing inconsistent and small effects of trusting behavior’s unequal endowments (Durlauf, 2002).

This study has focused on the research of the experimental trust game to aid in the analysis of the dynamics of trust and the inequality in an economy. Partners in each round were informed of their opponent’s wealth accumulation as they played (Alesina & Ferrara, 2002). From these, one can infer that efficiency and trust are highly rated in the economy. They begin with equal endowments. However, it decreases as time goes by. When these endowments appear to be unequal, it is obvious that the trust is low initially. However, it is important to note that the decrease is relatively stable. From these, it is evident that one’s distribution of wealth as compared to another tends to outperform in an unequal economy as compared to an equal economy. The differences can be partly attributed to the fact that the conditional trust appears to be less prevalent in the unequal endowments, than the equal endowments (Zak & Knack, 2001). In addition, if the inequality dynamics are studied within countries, the economies can gain stability. Jurisdictional as well as fairness process and trust are also included in the economic inequality dynamics. Therefore, the study explains how the relationship between inequality and trust affects efficiency and economic growth.

References

Alesina, A., & La Ferrara, E. (2002). Who trusts others?. Journal of public economics, 85(2), 207-234.

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B´enabou, R. (1996), Inequality and Growth, in B. S. Bernanke and J. J. Rotemberg, eds, ‘NBER Macroeconomics Annual’, Cambridge, MA: The MIT press.

Corneo, G., & Grüner, H. P. (2000). Social limits to redistribution. The American Economic Review, 90(5), 1491-1507.

Corneo, G., & Jeanne, O. (2001). Status, the distribution of wealth, and growth. The Scandinavian Journal of Economics, 103(2), 283-293.

Durlauf, S. N. (2002). On The Empirics of Social Capital. The economic journal, 112(483), F459-F479.

Galor, O., & Zeira, J. (1993). Income distribution and macroeconomics. The review of economic studies, 60(1), 35-52.

Glaeser, E. L. (2005), ‘Inequality’. Harvard Institute of Economic Research Discussion Paper, 1(2078), 6-7.

Glaeser, E. L., Laibson, D., & Sacerdote, B. (2002). An economic approach to social capital*. The Economic Journal, 112(483), F437-F458.

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Knack, S., & Keefer, P. (1997). Does social capital have an economic payoff? A cross-country investigation. The Quarterly journal of economics, 112(4), 1251-1288.

Kuznets, S. (1955). Economic growth and income inequality. The American economic review, 45(1), 1-28.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. W. (1997). ‘Trust in Large Organisations’. American Economic Review, 87(2), 333–338.

Ros, J. (2003). Development theory and the economics of growth. Ann Arbor, MI: University of Michigan Press.

Zak, P. J., & Knack, S. (2001). Trust and growth. The economic journal, 111(470), 295-321.

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StudyCorgi. (2020, December 31). Trust and Inequality as Economic Influences. Retrieved from https://studycorgi.com/trust-and-inequality-as-economic-influences/

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StudyCorgi. "Trust and Inequality as Economic Influences." December 31, 2020. https://studycorgi.com/trust-and-inequality-as-economic-influences/.

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StudyCorgi. 2020. "Trust and Inequality as Economic Influences." December 31, 2020. https://studycorgi.com/trust-and-inequality-as-economic-influences/.

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StudyCorgi. (2020) 'Trust and Inequality as Economic Influences'. 31 December.

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