Trust, welfare states and income equality: Sorting out the causality Andreas Bergh a , Christian Bjørnskov b, ⁎ a Lund University, Department of Economics, Box 7082, SE-22007 Lund, Sweden b Aarhus University, Department of Economics and Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark article info abstract Article history: Received 29 November 2013 Received in revised form 2 June 2014 Accepted 8 June 2014 Available online 16 June 2014 The cross-country correlation between social trust and income equality is well documented, but few studies examine the direction of causality. We show theoretically that by facilitating cooper- ation, trust may lead to more equal outcomes, while the feedback from inequality to trust is am- biguous. Using a structural equation model estimated on a large country sample, we find that trust has a positive effect on both market and net income equality. Larger welfare states lead to higher net equality but neither net income equality nor welfare state size seems to have a causal effect on trust. We conclude that while trust facilitates welfare state policies that may reduce net inequality, this decrease in inequality does not increase trust. © 2014 Elsevier B.V. All rights reserved. JEL classification: H10 D63 D69 Keywords: Social trust Inequality Welfare state 1. Introduction The cross-country correlation between social trust and national income equality is well documented, but few studies examine the direction of causality. It is often assumed that inequality leads to lower trust (Alesina and la Ferrara, 2002; Uslaner, 2002; Delhey and Newton, 2005; Bjørnskov, 2007, 2008), but the theoretical mechanisms involved are still subject to debate (as shown in overviews by Jordahl, 2008 and Nannestad, 2008), as are those between inequality and economic development (e.g. de Dominics et al., 2008). A mechanism supporting a causal link from trust to equality is suggested by findings in Bergh and Bjørnskov (2011) and Bjørnskov and Svendsen (2013), which show that historical trust levels explain current welfare state size. If larger welfare states lead to an increase in income equality, trust may impact equality through an expansion of the welfare state. Moreover, if the correlation between equality and trust indicates that equality causally increases trust, positive feed-back dynamics may take place, such that equality increases trust, and trust facilitates the implementation of welfare state redistribution, further fostering equality. Such dynamics are even more likely if universal welfare state policies have a positive effect on trust, as suggested by Barr (2004) and Kumlin and Rothstein (2005). On the other hand, if the cross-country correlation between income equality and social trust is driven only by the fact that deeply rooted trust levels explain both trust today and the degree of welfare state redistribution, there is no feed-back dynamic from redistributive welfare state policies to trust. The possible causal relations are illustrated in Fig. 1, where full arrows show causal relations argued for in previous literature. This paper investigates the causality between trust and equality, and the potential role of welfare state policies as mediators of the causal associations. We do so by exploring two central questions, not dealt with before. First, do welfare states have an independent effect European Journal of Political Economy 35 (2014) 183–199 ⁎ Corresponding author. Tel.: +45 87 16 48 19. E-mail addresses: Andreas.Bergh@nek.lu.se (A. Bergh), ChBj@econ.au.dk (C. Bjørnskov). http://dx.doi.org/10.1016/j.ejpoleco.2014.06.002 0176-2680/© 2014 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect European Journal of Political Economy journal homepage: www.elsevier.com/locate/ejpe