Does Trust Influence Social Expenditures? Evidence from Local Governments

Abstract

Summary We document that trust has a positive impact on the generosity of welfare spending. Our analysis relies on a unique dataset including detailed budgetary data of more than 2,000 Italian municipalities. Compared with previous contributions based on cross‐country data, our approach reduces the risk of omitted variable bias and measurement errors. Furthermore, drawing on Italy's rich political history, we are able to use an instrumental variables strategy that addresses the possible endogeneity of trust.