Trust and Economic Performance: A Panel Study

This paper critically reviews the current various measures of trust through surveys/questionnaires and trust experiments. The main shortcoming from such approaches is that the trust index produced from surveys and experiment are ambiguous. Given these arguments, I use Factor Analysis technique to construct a new trust index that account for indicators of degree of trust. Consequently, the rankings of countries in my index is more consistent compared to the rankings of existing trust indices. Using the above, I illustrate the panel analysis on the influence of trust on FDI inflows and income inequality. Trust turns out to play a significant role on FDI inflows. With regard to income inequality, trust is more pronounced among the OECD countries