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Free to Trust? Economic Freedom and Social Capital

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Abstract

We present new evidence on how generalized trust is formed. Unlike previous studies, we look at the explanatory power of economic institutions, we use newer data, we incorporate more countries, and we use instrumental variables to handle the causality problem. A central result is that legal structure and security of property rights (area 2 of the Economic Freedom Index) increase trust. The idea is that a market economy, building on voluntary transactions and interactions with both friends and strangers within the predictability provided by the rule of law, entails both incentives and mechanisms for trust to emerge between people.

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Bibliographic Info

Paper provided by The Ratio Institute in its series Ratio Working Papers with number 64.

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Length: 31 pages
Date of creation: 14 Jan 2005
Date of revision:
Publication status: Published in Kyklos, 2006, pages 141-169.
Handle: RePEc:hhs:ratioi:0064

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Keywords: social capital; trust; economic freedom; rule of law; property rights; legal system;

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  1. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
  2. Greif, Avner, 1989. "Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 857-882, December.
  3. Klaus Deininger & Lyn Squire, 1996. "A New Data Set Measuring Income Inequality," CEMA Working Papers 512, China Economics and Management Academy, Central University of Finance and Economics.
  4. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  5. Werner Güth & Axel Ockenfels, 2002. "The Coevolution of Trust and Institutions in Anonymous and Non-anonymous Communities," Papers on Strategic Interaction 2002-07, Max Planck Institute of Economics, Strategic Interaction Group.
  6. Christian Bjornskov, 2003. "The Happy Few: Cross--Country Evidence on Social Capital and Life Satisfaction," Kyklos, Wiley Blackwell, vol. 56(1), pages 3-16, February.
  7. Alesina, Alberto F & La Ferrara, Eliana, 2000. "Who Trusts Others?," CEPR Discussion Papers 2646, C.E.P.R. Discussion Papers.
  8. Bruni, Luigino & Sugden, Robert, 2000. "Moral canals: trust and social capital in the work of Hume, Smith and Genovesi," Economics and Philosophy, Cambridge University Press, vol. 16(01), pages 21-45, April.
  9. Hongyi Li & Lyn Squire & Tao Zhang & Heng-fu Zou, 1999. "A Data Set on Income Distribution," CEMA Working Papers 575, China Economics and Management Academy, Central University of Finance and Economics.
  10. Sjoerd Beugelsdijk & Henri L.F. de Groot & Anton B.T.M. van Schaik, 2004. "Trust and economic growth: a robustness analysis," Oxford Economic Papers, Oxford University Press, vol. 56(1), pages 118-134, January.
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