In-group versus out-group trust: the impact of income inequality.

• Author: Lei, Vivian

1. Introduction

   What promotes trust and what destroys it? Various studies have shown that institutional development, age structure, population size, religious composition, income inequality, and ethnic diversity are linked to, and may directly impact, the overall trust level in a society or community (see, for example, Knack and Keefer 1997; La Porta et al. 1997; Zak and Knack 2001; Knack and Zak 2002; Uslaner 2002; Zelmer 2003; Berggren and Jordahl 2006; Bjornskov 2006). Of all these variables, income inequality, measured by the Gini coefficient, is perhaps the most consistent and robust determinant of social solidarity and trust: Greater income inequality widens the social distance between different income classes and thereby reduces the overall level of trust.

   There are two things worth noting about this particular result. First, while it can be shown with cross-country data that income inequality is strongly associated with lower trust, the causal relation between these two variables is not yet clear due to omitted variables and endogeneity problems. Second, the measure of trust used in most of the empirical literature is based on responses to the question "Generally speaking, would you say that most people can be trusted or that you can't be too careful in dealing with people?" from the World Values Surveys. Responses to this survey question reflect at best respondents' attitude regarding generalized trust, to say nothing of the finding by Glaeser et al. (2000) that they are a much better predictor of a society's overall level of trustworthiness rather than of trust. Note that to study exactly how income inequality affects trust, it is necessary to first identify what type of trust--generalized or particularized trust--that the research question is meant to address. Contrary to generalized trust that involves faith in a wide range of strangers, particularized trust, also called in-group trust, concerns faith in primarily in-group members--people of "one's own kind" or people who share the same values and norms via social ties or social identities (Uslaner 2002). Inequality influences particularized trust by allowing social identities that are associated with different income classes to be developed. Social identities create similarity, and similarity cultivates trust among in-group members (see, for example, Allport 1954; Coleman 1990; Fukuyama 1995; Alesina and La Ferrara 2000; Hardin 2006). While Allport (1954) argues that in-group positivity does not necessarily imply out-group negativity, income inequality could nevertheless activate out-group hostility and further facilitate in-group favoritism if it creates conflicts over scarce resources or political power between different income classes (Sherif and Sherif 1953; LeVine and Campbell 1972; Brewer 1999).

   Given the limited field data that can be directly used to measure the impact of income inequality on particularized trust, this article contributes to the literature by studying the relationship between inequality and in-group favoritism in a stylized laboratory environment. The specific research questions are as follows: Does income inequality induce in-group favoritism in the sense that people trust their in-group members more than they trust out-group members? And if so, would such an in-group bias be strong enough to survive the removal of the inequality?

   We divide the experiment into two parts. To introduce income disparity in the first part of the experiment, we follow Anderson, Mellor, and Milyo (2006) and randomly reward half of the subjects with a common participation fee. (1) In other words, subjects are equally and randomly divided into two groups: the rich and the poor (they are referred to as "Type A" and "Type B," respectively, in the experiment). Two treatments are adopted in order to investigate if participants trust in-group and out-group members differently. The first treatment involved a variant of the investment game introduced by Berg, Dickhaut, and McCabe (1995). In this game, subjects are divided into pairs that consisted of a first mover and a second mover. The first mover is given the opportunity to transfer none, some, or all of his 10-franc cash endowment to his paired counterpart. The first mover has no information regarding the second mover's identity, and is required to specify the amount of money he wishes to transfer given two possibilities: (i) the second mover is Type A, and (ii) the second mover is Type B. Given the second mover's type and the first mover's corresponding decision, all money passed on is tripled by the experimenter and given to the second mover. The second mover, after receiving the money, has the opportunity to return none, some, or all of the money. The second mover, also having no information about her counterpart's identity, is required to make a contingent decision similar to the first mover's.

   Note that if we simply compare the amounts sent to different types in the above investment game, we will likely pick up motivations that do not concern in-group and out-group trust. Therefore, we follow Cox (2004) and introduce a variant of his dictator game as our second treatment to disentangle transfers motivated by trust from transfers motivated by other-regarding preferences. The dictator game is very much like the investment game described above except that the second mover has no decision to make and thus is not able to return any money even if she wishes.

   We study the impact of removing income inequality in the second part of the experiment under two income conditions. Under the high condition, a participation fee is rewarded to all subjects in a given session. Under the low condition, no participation fee is rewarded to anyone. In other words, subjects become either equally rich or equally poor after experiencing the phenomenon of income disparity. No redistribution policy is employed in order to avoid its effects being compounded with those of trust and other-regarding preferences. Finally, group labeling and thus affiliation (Type A and Type B) remain in effect even after the income disparity is removed. Note that even though social psychologists have found that the mere categorization of people into two groups (the minimal group paradigm) is extremely effective in cultivating in-group favoritism, there exists mixed evidence as to whether or not group affiliation by itself would affect trust in the economics literature. For example, while Guth, Levati, and Ploner (2005) find no significant impact of group identity on first movers' transfer decisions, Buchan, Johnson, and Croson (2006) find support for in-group bias from a pool of American subjects. (2)

   Our main findings are as follows. In the presence of income inequality, we find that first movers, regardless of their income level, tend to trust the rich significantly more than they trust the poor. Since, for a given type of first movers, the proportions retuned from the rich and the poor are not statistically different from each other, we believe that such in-group and out-group trust on the part of first movers is less likely to be a calculative move based on a norm or an expectation that poor second movers, out of perhaps fairness concerns, would keep more and return less. After income inequality is removed, we find that most first movers, except those originally rich, become equally trusting toward both the rich and the poor. This result suggests that in-group as well as out-group favoritism can be alleviated by an equal income distribution.

   The rest of our article is organized as follows. Section 2 describes the experimental design and procedures and sections 3 and 4 report the results. Section 5 concludes with a brief summary and discussion.

2. The Experiment

   The experiment consisted of two treatments (games) and 16 sessions executed in a between-subjects design. Sessions were conducted at the University of Wisconsin-Milwaukee (UWM), Hong Kong University of Science and Technology (HKUST), and City University of Hong Kong (CityU) between March 2006 and July 2007. A total of 268 subjects were recruited either from introductory economics courses (at UWM and CityU) or via a university-wide e-Recruit system (at HKUST). Some of the subjects may have participated in economics experiments before, but none had any experience in experiments similar to ours. No subject participated in more than one session of this study. On average, sessions lasted about 50 minutes including initial instruction period and payment of subjects. The experiment was conducted in an experimental currency, called "francs," which was converted to local currencies at a predetermined and publicly known conversion rate. Subjects earned an average of US$9.58. The experiment was computerized using the Z-tree software package (Fischbacher 2007).

   The two treatments were an investment game, built on Berg, Dickhaut, and McCabe (1995), and a dictator game, built on Cox (2004). Each treatment was made of eight sessions and each session was divided into 20 rounds and two parts (Part I...