Testing The Pearl Hypothesis: Natural resources and trust

Do natural resources reduce social trust? This paper reviews the literature on natural resources and on trust. The existing theoretical and empirical literature suggests that natural resources can reduce trust through several indirect mechanisms. Notably, studies show that natural resources lead to institutional degradation, corruption, inequality, and civil war, all of which have been associated with reduced trust. In addition, game theoretical work on windfall gains suggests that there may be direct effect of natural resources on trust. This paper tests empirically whether there is a direct effect of natural resources on trust (The Pearl Hypothesis), using cross-country data. The results indicate that no such direct effect exists, but we find a significant effect on trust of intermediate variables affected by natural resources, such as institutions, corruption, inequality and/or civil war. Importantly, the relationship between corruption and trust turns out to be non-linear, indicating that the effect of natural resources on trust depends on the initial corruption level of a country. In highly corrupt societies, institutional improvements that reduce corruption may also undermine trust, which poses difficult challenges for anti-corruption policy.