HLEG thematic workshop on Measuring Trust and Social Capital, 10 June 2016, Paris, France. More information at: www.oecd.org/statistics/measuring-economic-social-progress/hleg-workshop-on-measuring-trust-and-social-capital-2016.htm

1. The European Trust Crisis
Yann Algan (Sciences Po), Sergei Guriev (Sciences Po),
Elias Papaioannou (LBS) & Evgenia Passari (Paris Dauphine)
June 2016

2. Motivation: Trust and Economic Efficiency
There is a long run link between Trust and proxies of Economic
Performance
Key challenge. Short-run correlates; long-run determinants
Reviews: Algan and Cahuc (2013); Guiso, Sapienza and Zingales
(2011); Durlauf and Fafchamps (2005); Fernandez (2014)

3. Motivation: Trust and Economic Efficiency
Proxies of trust and social capital also found to correlate with:
Development (Tabellini, JEEA 2010)
Economic growth (Knack and Keefer, QJE 1998, Algan and Cahuc,
AER 2008)
Inequality (Alesina and Angeletos, AER 2005)
Corruption and Red tape (Aghion et al., 2010)
Financial development (Guiso, Sapienza and Zingales, QJE, 2008)
Labour market institutions (Algan and Cahuc, AEJ, 2009)
Organisational structure (La Porta et al., 1997; Bloom, Sadun and Van
Reenen,QJE 2013)

4. What shapes trust and beliefs?
I. Long run factors and historical traits
Large differences in civic capital between the North and the
South of Italy date to medieval times (Putnam, 1993)
Social capital higher in regions where, during medieval times,
there were semi-autonomous city states (Guiso, Sapienza and
Zingales, 2008)
Low levels of trust in Africa traced back to the slave trades of
1400 - 1700 (Nunn and Watchekon, AER 2011)
Beliefs about gender roles have deep roots related to the type of
agricultural production, well before the Industrial Revolution took
place (Alesina, Giuliano and Nunn, 2011)

5. What shapes trust and beliefs?
II. Time-Varying features, Business Cycle Variations
Social capital can also react to recent economic events. Costs of
business cycles not limited to current consumption volatility
Large, negative and persistent effect of graduating from college
during a recession (Kahn, 2010)
Lasting impact on preferences and values that may in turn
negatively affect economic and political decisions (Giuliano and
Spilimbergo, RESTUD 2014)
Impact of stock market performance on risk aversion (Malmendier
and Nagel, AER 2007)
Effect of business cycle on Trust (Ananiev and Guriev 2015)

6. European Crisis and Trust
Some alarming features:
Heterogeneity: Centre versus South; Transition Economies
/Eastern Europe
Rise of populism
Distrust in local political system; Political polarization; Social and
political extremism
A growing hostility towards immigrants and minorities
General Distrust towards the EU, Local and International
(European) institutions

7. European Crisis and Trust (Implications)
Implications:
European integration and completion of EMU (Guiso, Sapienza,
and Zingales)
Social stability and labor market institutions (Algan and Cahuc,
EJ 2015)
Institutional design and structural reforms (Aghion, Algan, Cahuc,
and Shleifer, QJE 2010)

8. This paper
Assess the impact of the crisis in Europe on trust and beliefs
General trust
Trust towards institutions (e.g., political parties, courts, EU, UN)
Causality and mechanisms

9. Roadmap
Approach and Data
Baseline Results: within Country, across Region, over Time
Analysis
Heterogeneity
IV approach

10. Methodological Approach
Within country, across region, over time analysis analysis (data
from European Social Surveys on Beliefs and Trust and from
Eurostat on regional output and unemployment; WVS for
cross-validation)
Unit of analysis: EU regions before and after the crisis (e.g. Kriti,
Ipeiros, Rioja, Catalonia)
Correlation analysis. Difference before-after crisis period
Instrumental variables:
Extract the component of fall in GDP (and increase in
unemployment) stemming from EU-wide (or OECD excl. EU) factors
(pre-crisis composition of the economy)

11. Preview of results
Crisis leading to distrust and distorted beliefs (country level and
regional level)
Impact particularly strong for trust towards national institutions and
the EU
Less impact on general trust, little impact on trust towards police
and the UN
Impact stronger with unemployment as compared to GDP
(perhaps due to measurement error)
Impact not exclusively driven by the unemployed
OLS and IV provide similar results.

12. Data
Micro-level survey data capturing trust and beliefs, from the
biennial European Social Survey (ESS) for 23 countries
(unbalanced), between 2002 and 2014 (7 waves, repeated
cross-sections)
Trust People; Trust in European Parliament; Trust in National
Parliament; Trust in Political Parties; Trust in Politicians; Trust the
Police; Trust the Legal System; Trust in United Nations
People are fair; People are helpful
Macro variables at NUTS2 level from Eurostat and OECD
corresponding to (fairly aggregated) regions of 800k to 3 million
inhabitants (regional GDP, regional unemployment)
Micro-level survey data capturing trust and beliefs, from the World
Values Survey (WVS) for 7 EU countries (unbalanced), on 2005,
2006, 2009, 2011, 2012 and 2013 for comparison purposes

13. Trust towards the European Union before & after the
Crisis (ESS)

14. Evolution of trust towards the European Union
(Eurobarometer)

15. Preliminary Country level Analysis

16. Preliminary Country level Analysis

17. Preliminary Country level Analysis

18. Preliminary Country level Analysis
CyprusCyprus
GermanyGermany
SpainSpain
NetherlandsNetherlands
PolandPoland
SwedenSweden
SloveniaSlovenia
-.10.1.2.3
DifferenceinTrustinPeople(WorldValuesSurvey)
-10 -5 0 5 10
Difference in Unemployment (Before and After Crisis)
Source: World Values Survey and Eurostat
Before and After Crisis
Trust in People and Unemployment

19. Preliminary Country level Analysis
CyprusCyprus
GermanyGermany
SpainSpain
NetherlandsNetherlands
PolandPoland
SwedenSweden
SloveniaSlovenia
-.1-.050.05.1.15
DifferenceinTrustintheParliament(WorldValuesSurvey)
-10 -5 0 5 10
Difference in Unemployment (Before and After Crisis)
Source: World Values Survey and Eurostat
Before and After Crisis
Trust in the Parliament and Unemployment

20. European Economic crisis and Variation in Trust
Collapse in Country level, Time and Country f.e.
OLS Non Instrumented, Collapsed by Country. Waves 1, 2, 3 &5, 6, 7
Benchmark Specification - Full Sample - Dependent Variable: Trust Variables, Country and ESS round FE
Trust People PC Trust Nat. Politics Trust EU Parl. Trust Police Trust Legal Syst. Tust UN
Unemployment -0.0022** -0.0551*** -0.0064*** -0.0016 -0.0064*** -0.0019
t-stat (-2.27) (-4.62) (-3.29) (-1.48) (-4.69) (-1.33)
Within R2 0.101 0.295 0.168 0.023 0.208 0.034
Overall R2 0.976 0.899 0.69 0.939 0.94 0.896
N 142 142 142 142 142 142
Countries 24 24 24 24 24 24
(Standard errors adjusted for clustering at country level, t-stat in parentheses)

21. General Trust & Institutional Measures

22. Principal Component of Political Trust & Institutional
Measures

23. Cross-regional evidence: Exploiting within country
variation
These correlations cannot indicate causality
Exploit within country variation by running regressions at regional
(NUTS2) level
As the regions are heterogeneous in GDP per capita they should
experience different changes in trust
Controlling for time and country common characteristics and
working in differences mitigates reverse causality considerations
(that changes in trust cause changes in GDP)
Trust variables are persistent unlike GDP which is volatile

24. Cross-regional evidence

25. Cross-regional evidence

26. Cross-regional evidence

27. European Economic crisis and Variation in Trust
Collapse in NUTS regions, time and country f.e.
OLS Non Instrumented, Collapsed by NUTS region, Waves 1, 2, 3 &5, 6, 7
Benchmark Specification - Full Sample - Dependent Variable: Trust Variables, NUTS and ESS round FE
Trust People PC Trust Nat. Politics Trust EU Parl. Trust Police Trust Legal Syst. Tust UN
Unemployment -0.0018** -0.0416*** -0.0043*** -0.0007 -0.0049*** -0.0008
t-stat (-2.33) (-4.65) (-3.39) (-0.67) (-5.87) (-0.83)
Within R2 0.022 0.19 0.069 0.003 0.092 0.004
Overall R2 0.87 0.833 0.564 0.825 0.843 0.721
N 1081 1081 1081 1081 1081 1081
183 183 183 183 183 183
Employed - Full Sample - Dependent Variable: Trust Variables, NUTS and ESS round FE
Trust People PC Trust Nat. Politics Trust EU Parl. Trust Police Trust Legal Syst. Tust UN
Unemployment -0.0016* -0.0393*** -0.0040*** -0.0002 -0.0047*** -0.0003
t-stat (-2.04) (-4.65) (-3.22) (-0.17) (-5.77) (-0.35)
Within R2 0.019 0.171 0.057 0 0.084 0.001
Overall R2 0.868 0.83 0.556 0.825 0.841 0.709
N 1081 1081 1081 1081 1081 1081
Countries 183 183 183 183 183 183
Unemployed - Full Sample - Dependent Variable: Trust Variables, NUTS and ESS round FE
Trust People PC Trust Nat. Politics Trust EU Parl. Trust Police Trust Legal Syst. Tust UN
Unemployment -0.0008 -0.0442*** -0.0055*** -0.0019 -0.0045** -0.0013
t-stat (-0.71) (-3.13) (-2.91) (-1.24) (-2.47) (-0.71)
Within R2 0.001 0.06 0.026 0.002 0.015 0.001
Overall R2 0.487 0.583 0.379 0.426 0.488 0.416
N 1045 1043 1040 1044 1044 1043
Countries 180 180 180 180 180 180

28. Issues
Reverse Causation
Measurement Error
Omitted Variables
Need to find an instrument for GDP decline (unemployment
increase): a factor that would affect the fall in GDP during the
crisis but would not affect the change in trust directly

29. IV1: Alternative regional GDP series based on
industrial composition of each region
To further push on causation, we re-run the regressions of the
impact of GDP (unemployment) in trust instrumenting GDP
(unemployment) variation by some meaningful exogenous
variation based on the industrial composition of each region
Income in Region i at time t (industrial indexi,t )
=
Initial industrial composition in region i (av. 2000-2007)
x
Industrial production in OECD countries excluding EU at time t
First stage: Xi,t = a + b ∗ Zi,t
where Xi,t = Log GDPi,t , and Zi,t = industrial indexi,t

30. IV1: First stage

31. IV1: Alternative regional GDP series based on
industrial composition of each region
UNEMPLOYMENT - NUTS LEVEL - FULL SAMPLE
Panel A: 2-SLS Estimates
Trust People PC Trust Nat. Politics Trust EU Parl. Trust Police Trust Legal Syst. Trust UN
Alt. lGDP pc
-0.001** -0.056*** -0.004*** 0.000 -0.005*** 0.000
s.e. (0.001) (0.008) (0.001) (0.001) (0.001) (0.001)
Overall R2 0.856 0.804 0.571 0.811 0.817 0.670
Obs 863 863 863 863 863 863
Panel B: 1st Stage Estimates:
Alt. lGDP pc -125.419
s.e. (17.056)
F.S. F-score 118.99
p-value 0.00
Obs 863
Panel C: Reduced Form Estimates
Alt. lGDP pc 0.1557* 7.0180*** 0.5236** 1.1314*** 0.6246*** -0.0436
s.e. (0.09) (1.03) (0.19) (0.20) (0.15) (0.12)
Overall R2 0.852 0.794 0.549 0.763 0.8 0.672
Obs 863 863 863 863 863 863
NUTS 175 175 175 175 175 175

32. Conclusion
The crisis, that has affected European countries disproportionally, has
led to a divergence of trust, and beliefs. In particular:
Crisis-hit countries and regions (mostly in European South) have
experienced a sharp decline of trust towards the domestic
political system and the EU
This result holds true when we carry the analysis in regional data.
By exploring within country variation we are able to mitigate
reverse causality issues
The IV results lend further support and validate our initial
conjecture that business cycle effects are a driver of trust and
beliefs
Generalized social trust is also affected but the magnitude of the
effect is much smaller

33. Work in progress
Explore the heterogeneous effects of economic downturn of
individuals of different:
gender
age cohorts
employment status
national background (natives, immigrants)...
...in order to further understand the origins of the trust crisis and its
medium/long run implications