In-group vs. Out-group Trust: The Impact of Income Inequality

Abstract In this paper, we adopt a variant of the trust game by Berg, Dickhaut, and McCabe (1995) and the dictator game by Cox (2004) to study if income inequality can activate in-group favoritism and, if so, whether such a bias is strong enough to survive the removal of income inequality. We find evidence of in-group favoritism only on the part of rich first movers. Rich first movers trust their in-group members significantly more in the presence of income inequality not only before but also after they gain enough experience. Poor first movers, in contrast, do not exhibit such in-group bias. They do not discriminate between in-group and out-group at the very outset of the experiment, and once they become experienced, they behave with significantly more trust toward the rich than toward the poor. We also find that in-group and out-group favoritism established in the past can be alleviated, but not completely removed, by an equal income distribution