Entrepreneurship, trust and corruption

I propose a theoretical model where trust towards strangers is a channel through which institutions determine economic outcomes, in particular, entrepreneurship and corruption. More importantly, I show that the role of trust has been overlooked since high levels of trust do not always enhance desirable economic outcomes. Trust helps individuals to participate in economic exchanges aligned with social welfare, but it also facilitates individuals to cooperate for the achievement of corrupt deals. Under this more general view of trust, the model generates a non-trivial new prediction at the individual level. Specifically, the individual-level relationship between honesty and trust changes depending on the institutional quality of a country. Dishonest individuals are the more trusting individuals in countries with poor institutions, and the less trusting in countries with good institutions. Using individual-level data of 80 countries from the World Value Survey and the European Values Study, I present empirical evidence in support of this prediction.