The Dynamic Interplay of Inequality and Trust - An Experimental Study∗

We study the interplay of inequality and trust in a dynamic growth game, in which trust increases efficiency and thus allows higher growth of the laboratory economy in the future. We find that trust is initially high in a treatment starting with equal endowments, but decreases over time. In a treatment with unequal endowments, trust is initially lower yet remains relatively stable. The reason is that, with unequal initial endowments, trust depends less on wealth comparisons. As a result, with respect to efficiency, the initially more unequal economy grows slower in the short run but faster in the long run, and the disparity of wealth distributions across economies mitigates over time.