Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2014:39: Institutional Quality, Trust and Stock-Market Participation: Learning to Forget

Hossein Asgharian (), Lu Liu () and Frederik Lundtofte ()
Additional contact information
Hossein Asgharian: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Lu Liu: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Frederik Lundtofte: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: We explore the relation between institutional quality, trust and stock-market participation. In our theoretical model, agents update their beliefs in a Bayesian manner based on observations on frauds and choose whether to invest in the stock market. The corresponding empirical model shows that institutional quality affects trust and that the part of trust that is explained by institutional quality influences stock-market participation. For immigrants, we consider learning factors, such as education and duration of stay, and we find that the impact of the institutional quality of the country of residence, relative to that of the home country, tends to increase with education.

Keywords: institutional quality; learning; trust; stock-market participation

JEL-codes: C13; G11

49 pages, November 20, 2014

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