The Role of Trust in Financial Decisions

Abstract

Trust is an essential element of individuals' willingness to engage in economic activity such as investment. Because cultural institutions influence individuals' trust, I examine whether shocks to trust in a prominent cultural institution have crossover effects on households’ investment decisions. I employ the U.S. Catholic clergy abuse scandal from 2002 to 2006 as a plausibly exogenous shock to the Catholic Church. Using survey data, I find that Catholic households decrease their equity participation by 3.3% to 5.9% upon revelation of local clergy misconduct in the news, consistent with an economically sizable opportunity cost. Evidence points to the influence of Catholicism on local social norms as the main channel.