“Trust and Household Finance” by Danling Jiang
Florida State University
Sonya S. Lim
Using a representative sample of U.S. individuals, we provide evidence that trust is an important determinant of an array of household financial decisions and outcomes. Individuals more trusting of others are less likely to be in debt, miss payments, file bankruptcy, or go through foreclosure. Their households have lower financial leverage, higher retirement savings and assets, and greater net worth. We show a causal impact of trust on financial outcomes by extracting the component of trust determined by an individual's cultural background or early life experiences, and also by purging out the component of trust correlated with prior economic success. The effect of trust is more pronounced among females and those who have lower education or income. Our further evidence suggests that enhancing individuals' trust, and to the right amount, can improve household financial well-being.