STOCKHOLM SCHOOL OF ECONOMICS Department of Economics ĂĐŚĞůŽƌ͛ƐdŚĞƐŝƐŝŶĐŽŶŽŵŝĐƐ June 8th 2012 INCOME INEQUALITY AND SOCIAL TRUST: THE CASE OF WINDHOEK Agneta Berge (22044) Thorun Wahlström (21935) ABSTRACT Social trust appears to be beneficial for society, but varies greatly in level across countries. Income inequality has been proposed as a strong determinant of social trust, although often without sufficient micro foundation. Employing the notion of distributive justice, we derive three micro level mechanisms between income inequality and social trust and test them empirically. tĞĐĂůůƚŚĞŵĞĐŚĂŶŝƐŵƐ͞ŝŶĞƋƵĂůŝƚLJ ĂǀĞƌƐŝŽŶ͕͟͞ǁŝŶŶĞƌƐǀĞƌƐƵƐůŽƐĞƌƐ͟ĂŶĚ͞ƚŚĞďĞůŝĞĨƚŚĂƚŽŶĞĐĂŶŶŽƚŐĞƚƌŝĐŚďLJũƵƐƚŵĞĂŶƐ͘͟ Using cross- sectional data that we collect in Windhoek, Namibia, we see that the belief that one cannot get rich by just means appears to be associated with lower social trust, by how untrustworthy behavior is generated in society. However, as our data supports only one out of three micro level mechanisms, distributive justice theory alone appears not to suffice in uncovering the mechanisms between income inequality and social trust. The data also indicates that a theory on income inequality as determinant of social trust should include how trustworthy behavior is generated. Future microeconomic research can take this further by inVestigating income inequality and trustworthy behavior in relation to inequality of opportunity and corruption. Future macroeconomic research should employ measures that capture the skewness of an income distribution as a complement to the Gini index. Keywords: income inequality, social trust, distributive justice, Namibia JEL codes: D63, Z13 Tutor: Örjan Sjöberg Examiner: Kelly Ragan ACKNOWLEDGMENTS We would like to thank our tutor Örjan Sjöberg for assistance during the process of writing our thesis. The Central Bureau of Statistics in Namibia and Alwis Weerasinghe deserve our gratitude for their kind help and valuable insights. In addition, we thank Jette Bodin, who opened doors for us in Namibia. Erik Öberg and Hannes Malmberg, Ph.D. students at the Stockholm School of Economics, also provided us with constructive input, for which we are thankful. Lastly, we want to express our appreciation for the financial ƐƵƉƉŽƌƚĨƌŽŵ^ŝĚĂ͛ƐDŝŶŽƌ&ŝĞůĚ^ƚƵĚLJWƌŽŐƌĂŵ͘ ii CONTENTS Abbreviations .................................................................................................................................................. V Introduction ..................................................................................................................................................... 1 Theoretical background ................................................................................................................................... 2 Income inequality and institutions .............................................................................................................. 2 Measuring income inequality: the Gini index .......................................................................................... 2 Social trust: definition and determinants .................................................................................................... 2 Trust versus trust ..................................................................................................................................... 2 Determinants of social trust .................................................................................................................... 3 Trustworthiness, institutions and distributive justice ................................................................................. 5 Trustworthiness and asymmetric information ........................................................................................ 5 The role of institutions............................................................................................................................. 5 Fairness of society.................................................................................................................................... 6 Income inequality and distributiVe justice............................................................................................... 7 Distributive justice: micro level mechanisms .............................................................................................. 8 Inequality aVersion ............................................................................................................................... 8 Winners versus losers .............................................................................................................................. 8 The belief that one cannot get rich by just means .................................................................................. 9 Summary: Our theoretical framework ........................................................................................................ 9 Hypotheses .................................................................................................................................................... 10 Choice of case study country ......................................................................................................................... 10 Introducing Namibia .................................................................................................................................. 12 Method .......................................................................................................................................................... 13 Research method and data requirements................................................................................................. 13 Central challenges in quantitative data collection ................................................................................ 14 Stratified sampling ..................................................................................................................................... 15 Random sampling from each stratum: two methods to choose from .................................................. 15 Pilot study .................................................................................................................................................. 17 The final survey: the supermarket method ............................................................................................... 18 Random sampling at the supermarkets ................................................................................................. 19 The interview situation .......................................................................................................................... 19 Questionnaire design................................................................................................................................. 20 The social trust question........................................................................................................................ 20 Variables of interest ............................................................................................................................... 21 Data reliability ........................................................................................................................................... 22 iii Measurement error ............................................................................................................................... 23 Econometric data analysis ......................................................................................................................... 23 Linear probability model ........................................................................................................................ 23 Regression specifications ....................................................................................................................... 24 Predictions ............................................................................................................................................. 26 Empirical findings .......................................................................................................................................... 26 Data quality ............................................................................................................................................... 26 Response rate ........................................................................................................................................ 26 Representativeness................................................................................................................................ 27 Control variables .................................................................................................................................... 29 Measurement error ............................................................................................................................... 29 Econometric results ................................................................................................................................... 30 Comments on results ............................................................................................................................. 32 Theory implications ....................................................................................................................................... 33 Future research ........................................................................................................................................