Institutional trust is at the basis of the legitimacy and sustainability of political systems. Especially in periods of crisis - such as the one that started in 2007 or the most recent related to the COVID-19 pandemic - institutional distrust may represent a barrier to the implementation of recovery procedures causing great harm to society and damaging governments' capacity to act. In fact, institutional trust is also a pillar of social cohesion as it affects governments' ability to ruling and enables them to act without having to resort to coercion, thereby reducing transaction costs and increasing efficiency. As trust in institutions declines, support for democracy does as well. Surprisingly, in the past two decades, the spread of democratic systems has been accompanied, on the one hand, by a decline in trust in many institutions and, on the other hand, by a rise of income inequality. Hence, this project intends to shade light on these peculiar trends by studying the impact of income inequality on institutional trust. A flourishing branch of the literature explores the effects of inequality on individual beliefs and behaviours, including the consequences of rising inequality on trust. However, existing works impose a focus specifically on interpersonal trust, thus ignoring that inequality might also exert a non-negligible impact on institutional trust. They also remain silent on the mechanisms that might be at play in shaping this relationship. This project will contribute to the existing literature by providing the first evidence on the nexus between inequality and institutional trust and on the existence of potential transmission channels.
This project will offer several contributions to the existing literatures.
Concerning the first part of the project, previous works analyse the impact of inequality only on interpersonal trust. To the best of our knowledge, there is no contribution that shift the attention from interpersonal to institutional trust. To do this, we will match data from the Eurobarometer and EU-SILC surveys run over a sample of households residing in each of the EU-28 member states over the period 2003-2019. The Eurobarometer will offer information on institutional trust, while the EU-SILC will offer information on inequality and other distributional phenomena. From a methodological point of view, this project proposes a longitudinal perspective to the analysis, which has been neglected so far in the literature focused on the determinants of institutional trust.
Moreover, to instrument the main explanatory variable, that is inequality, on the base of the literature analysing the drivers of income inequality, we will employ a new instrument, namely informal economy (Davis 2007; Davis and Hopkins 2011; Docquier et al. 2017). Other contributions relayed on skill biased technological change to instrument inequality (see Barone and Mocetti 2016). However, this is a more appropriate instrument in the case of developed countries only. Since our sample will also encompass transition economies, we will opt for an alternative instrument that is likely to capture an effective driver of income inequality. Operationally, we will make use of the estimates of informal economy provided by Medina and Schneider (2017). Their estimates of informal economy are based on the theory of unobserved variables, which considers multiple causes and indicators of the phenomenon to be measured.
Concerning the second part of the project, there is no contribution that explores possible transmission mechanism from inequality to (institutional) trust. This project aims at filling this gap by considering two possible mediating channels: a "good" and a "bad" channel. The "good" channel will be represented by the diffusion of digital interactions between citizens and institutions. Because this is a relatively recent phenomenon, the economic literature is still lacking robust empirical evidence on its socio-economic effects, and this is also a gap that we aim at filling with this project. The "bad" channel, instead, will be represented by criminal activities. In this case, there are some empirical evidences on the nexus between crime and institutional trust, but they do not relate it to inequality, furthermore they do not distinguish between the effects of different kinds of crime.
From a policy perspective, the results of our analysis will contribute to widen knowledge about the determinants of trust in institutions and about the factors that might alleviate or worsen the adverse effects of inequality and other distributional phenomena on trust. Understanding this complex relationship becomes compelling especially after the COVID-19 pandemic, which is acting from one side by exacerbating inequalities on the long run and from the other by increasing the use that individuals make of online and digital tools.