Competition Builds Trust

Abstract: This paper shows that increases in (firm-level) competition positively impact (individual-level) trust. Using US states ’ banking de-regulation from the mid 1970s, we first show that an increase in competition had a causal impact on trust, measured in the General Social Survey (GSS). We develop a model which explains why increased competition within a state increases trust. The model also predicts a positive correlation between trust and sectoral competitiveness in the cross-section. We explore this implication using the 2004 wave of the GSS which we can match with US census of firms competition measures. The model’s predictions are strongly borne out