In whom do you trust? Analysing the Role of Social Capital in Reducing Income Inequality-A Panel Data Approach

Abstract

In this study, we examine if social capital, in the form of trust, networks, and institutions, affects income inequality across countries. We aim to build a narrative, supported by empirics that institutions embedded deeply in the fabric of the society play a critical role in motivating policies towards inclusive growth and distributive initiatives by the state. Policies aimed at distribution are a conscious choice that is driven by the society’s level of trust in each other. Higher levels of trust among citizens leads to cooperative behavior and solves social dilemmas thus reducing free riding problems. Also, high trusting and cooperative citizens are more likely to push governments for reforms and policies that aim at the provision of public goods and increased social spending. Voters’ limited acceptance of morally questionable behavior among politicians restrains rent-seeking problems in politics and encourages good governance. The study uses panel data analysis utilizing data from World Values Surveys. The basic model used for testing the relationship between social capital and income inequality is through the fixed effects models. For developing a meaningful analysis, we distinguish between civil social capital and government social capital. We establish that higher levels of generalized trust (civil social capital) among citizens leads to a reduction in income inequalities. The significance of social capital is reiterated when the variables for government social capital are introduced in the model. Our study establishes that indicators of government social capital, particularly lower corruption levels have a significant impact on reducing income inequality.