How much should we trust others? What are the consequences of trusting too much or too little?

We test the relationship between trust and income using data from the European Social Survey. This survey is particularly useful because individuals are asked to state the intensity of their trust beliefs on a scale between 0 and 10, rather than simply whether they believe that most people can be trusted or not (as in most surveys that ask trust questions). It is this feature that enables us to explore the relationship between individuals’ levels of trust and performance particularly at the tails of the distribution of trust beliefs.

When we regress individuals’ income on a set of dummies for the 11 different levels of trust we found a marked hump-shaped relationship: people with low levels of trust have significantly lower income than those with intermediate levels of trust. Income tends to reach a peak at a level of trust around 8, before declining rapidly for the highest levels of trust.

The magnitudes are economically significant as well. On average, individuals with the lowest level of trust have an income that is 14.5% lower than the income of those with the right amount of trust, which is a decline in income on par with the income lost by foregoing college. Those with the highest level of trust have an income that falls short of the peak by 7%. Thus, the cost of deviating from the right amount of trust can be substantial.