Costs of Mistrust between Ethnic Majority and Minorities: Evidence from Israel

Trust and ethnic diversity are important variables that may impact and explain different economic decisions. This paper presents theoretical models accompanied by a survey that deals with the relation between mistrust and risky economic activity (e.g., the postponement of receiving and paying for a risky asset). Using the theoretical models and surveys as a basis, we suggest that subjective discount rates and bids for a lottery can be used to measure levels of mistrust. The surveys are used to measure the level of mistrust between the Israeli majority (Jews) and minority groups (Israeli Arabs, Bedouins, and Palestinians), and between Israeli Jews from different districts. Based on the survey results we demonstrate the theoretical implications of the effect of mistrust (MT) on economic growth and resource allocation between the majority and minorities. We conclude that MT leads to inefficient resource allocation, which subsequently leads to low economic growth rates.