Does Foreign Aid Fuel Trust?

What are the socioeconomic effects of foreign aid in developing countries? How effective is aid in promoting social capital? The paper explores empirically these questions and it assesses the causal effect of foreign aid on trust in Uganda. Individuals living in counties that received aid exhibit higher probability to trust others with respect to those living in counties with no aid. On the intensive margin, increase in one percent in the value of aid projects disbursed induces a similar increase in the probability of trusting other people. We use also an instrumental strategy based on the enforcement of Non Governmental Organizations (Amendment) Act and we show that the link from aid to trust is robust to different estimation strategies. Finally, we find that a channel is operating through lowering inequality. We demonstrate that foreign aid has a stronger effect in counties where there is a lower level of perceived inequality.