DOES SOCIAL TRUST INCREASE INDIVIDUAL HAPPINESS IN JAPAN?* By MASANORI KUROKI University of California, Riverside Economists are mainly interested in trust as being growth enhancing, but whether trust is well-being enhancing is underexplored. This paper examines if trust is intrinsically valuable by using individual happiness data from Japan. I attempt to mitigate the problem of non-random selection of residents by restricting the sample to non-movers. I also address reverse causality by instrumenting trust with residential stability, as trust should be higher for a more stable community. I find that trust has positive and significant effects on individual happiness. The instrumental variables approach suggests that social trust has a causal effect on individual happiness. JEL Classification Number: I31. 1. Introduction Social trust, the belief that others around you can be trusted and the core component of social capital, is considered to lead to faster financial development and economic growth by reducing transaction costs and facilitating investment, and economists have attempted to identify the effect of trust on economic outcomes (Knack and Keefer, 1997; La Porta et al., 1997; Beugelsdijk et al., 2004). Both economic theory and experiment suggest that trust affects cooperative behaviour and leads to better outcomes. 1 Even though there are criticisms of the validity of these findings on effects of social trust or social capital, 2 the concept of social capital has received considerable publicity, and there is a widespread interest in social trust and other indicators of social capital among social scientists and policy-makers. Among measures of social capital, trust is of particular importance for economists. Economists are mainly interested in trust as being growth enhancing, but whether trust is well-being enhancing is underexplored. Does social trust have beneficial effects on one’s well-being by making aspects of life more enjoyable? If so, social trust is good not only because it leads to more successful economic outcomes but also because it is intrinsically valuable. Uslaner (1999) argues that social trust plays an important role in creating a vibrant community, as trust promotes civic participation. Trust also may encourage altruistic behaviour if it promotes the expectation that altruistic actions will * The Japanese General Social Surveys (JGSS) were provided by the Social Science Research on Japan, Institute of Social Science, University of Tokyo. The JGSS are designed and carried out by the JGSS Research Center at Osaka University of Commerce (Joint Usage/Research Center for Japanese General Social Surveys accredited by the Minister of Education, Culture, Sports, Science and Technology), in collaboration with the Institute of Social Science at the University of Tokyo. The author gratefully acknowledges the helpful comments of David Fairris,Todd Sorensen, two anonymous referees, Kazuo Ogawa (Co-editor), and participants at the joint conference of the International Association for Research in Economic Psychology (IAREP) and the Society for the Advancement of Behavioral Economics (SABE) in Cologne, Germany. 1 See La Porta et al. (1997) for an overview of the existing theory of trust. 2 For a critical discussion of the concept of social capital, see Durlauf (1999, 2002). The Japanese Economic Review The Journal of the Japanese Economic Association The Japanese Economic Review doi: 10.1111/j.1468-5876.2011.00533.x Vol. 62, No. 4, December 2011 444 © 2011 Japanese Economic Association