| Abstract: | We investigate the relationship between individual trust and individual economic performance. We find that individual income is hump‐shaped in a measure of intensity of trust beliefs. Our interpretation is that highly trusting individuals tend to assume too much social risk and to be cheated more often, ultimately performing less well than those with a belief close to the mean trustworthiness of the population. However, individuals with overly pessimistic beliefs avoid being cheated, but give up profitable opportunities, therefore underperforming. The cost of either too much or too little trust is comparable to the income lost by forgoing college. Our findings hold in large‐scale international survey data, as well as inside a country with high‐quality institutions, and are also supported by experimental findings. (JEL: A1, A12, D1, O15, Z1) |
