Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/177008 
Year of Publication: 
2017
Series/Report no.: 
IZA Discussion Papers No. 11204
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
This paper evaluates the effect of financial shocks on interpersonal trust levels, exploiting longitudinal survey data from 22,112 Australians. Using within-individual level variation, we find that trust does not change meaningfully following a positive financial shock (e.g., winning the lottery). However, trust falls sharply following a negative financial shock (e.g., bankruptcy). In terms of magnitude, this effect is approximately equivalent to the effect observed after one reports being the victim of physical violence or a property crime, but significantly larger than effects from a range of other individual-level shocks (e.g., being fired or getting divorced). We then explore a potential explanation of this finding related to locus of control, which relates to the extent to which people believe they are in control of their circumstances. Indeed, we find evidence consistent with this hypothesis as locus of control tends to change, and become less internal, following a negative financial shock. In turn, locus of control is closely associated with interpersonal trust levels.
Subjects: 
financial shocks
trust levels
locus of control
JEL: 
D90
E32
G40
Z1
Document Type: 
Working Paper

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