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Trust and Regulation: Addressing a Cultural Bias

Author

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  • Paolo Pinotti

    () (Bank of Italy JEL classification:L51, Z10, D02, K42)

Abstract

Cultural traits shape both the scope and the consequences of government intervention. Failing to account for cultural differences may therefore bias the estimated effects of regulation. This paper investigates the direction and the magnitude of this bias, from both a theoretical and an empirical point of view. It presents a simple model in which agents differ in terms of trust and trustworthiness, and average trust predicts average trustworthiness across countries. Entrepreneurial activity by the untrustworthy imposes negative externalities on the whole economy and burdensome entry regulations may lower these externalities at the cost of limiting economic activity by all agents. The model delivers two main predictions: within each country, preferences for regulations depend negatively on individual trust; across countries, lower trustworthiness drives higher levels of unofficial activity, negative externalities and government regulation, thus inducing a positive spurious correlation between all these variables. Evidence from individual level and cross-country data is consistent with these implications of the model. In particular, it suggests that a large part of the previously estimated negative effects of regulation can be attributed to omitted variation in cultural traits.

Suggested Citation

  • Paolo Pinotti, 2009. "Trust and Regulation: Addressing a Cultural Bias," Temi di discussione (Economic working papers) 721, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_721_09
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2009/2009-0721/en_tema_721.pdf
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    Cited by:

    1. Irina Denisova & Markus Eller & Ekaterina Zhuravskaya, 2010. "What do Russians think about transition?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(2), pages 249-280, April.
    2. Ferrante, Francesco & Ruiu, Gabiele, 2014. "Entrepreneurship. How important are institutions and culturally-based prior beliefs?," MPRA Paper 41915, University Library of Munich, Germany.
    3. D'Orlando, Fabio & Ferrante, Francesco & Ruiu, Gabriele, 2011. "Culturally based beliefs and labor market institutions," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(2), pages 150-162, April.

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    Keywords

    trust; regulations; unofficial economy; externalities;

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