Regulation and Distrust

Via Alex Tabarrok, the crew of Aghion, Algan, Cahuc and Shleifer shows that there’s more regulation in countries with higher overall levels of distrust:

It’s hard to know how you create and sustain high levels of trust, but my understanding is that there’s lots of research indicating the positive social benefits of trust. As Tabarrok says:

Crucially, when people distrust others they invest not in the highest return projects but in human and physical capital that is complementary to distrust — for example, they invest in human capital that helps them bond with their group/tribe/family rather than in human capital that helps them to bond with “outsiders” and they invest in physical capital that is more difficult to expropriate rather than in easier to expropriate capital, even though in both cases the latter investments may be the all-else-equal higher return investments.

Consequently, some of the apparent benefits of low levels of regulation may in fact be benefits of high levels of trust. At the same time, insofar as low levels of trust drive people to embrace regulatory solutions they’re likely to be disappointed.