() and Henrik Jordahl
Niclas Berggren: The Ratio Institute, Postal: P.O. Box 5095, SE-102 42 Stockholm, Sweden
Henrik Jordahl: Uppsala University, Postal: Department of Economics, P.O. Box 513, SE-751 20 Uppsala, Sweden, and, The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
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.
31 pages, January 14, 2005
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