Regulation and Distrust

Philippe Aghion (1) , Yann Algan (2) , Pierre Cahuc (3) , Andrei Shleifer (1)

1 Department of Economics, Harvard University
2 ECON - Département d'économie (Sciences Po)
3 X-DEP-ECO - Département d'Économie de l'École Polytechnique

In a cross-section of countries, government regulation is strongly negatively correlated with social capital. We document this correlation, and present a model explaining it. In the model, distrust creates public demand for regulation, while regulation in turn discourages social capital accumulation, leading to multiple equilibria. A key implication of the model is that individuals in low trust countries want more government intervention even though the government is corrupt. We test this and other implications of the model using country- and individual-level data on social capital and beliefs about government's role, as well as on changes in beliefs and in trust during the transition from socialism.

Domains: Economics and Finance

Philippe Aghion, Yann Algan, Pierre Cahuc, Andrei Shleifer. Regulation and Distrust. 2009. ⟨hal-00972819⟩