Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2005:2: Free to Trust? Economic Freedom and Social Capital

Niclas Berggren () and Henrik Jordahl
Additional contact information
Niclas Berggren: Ratio Institute, Postal: Box 5095, SE-102 42 Stockholm, Sweden
Henrik Jordahl: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, 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.

Keywords: social capital; trust; economic freedom; rule of law; property rights; legal system

JEL-codes: K42; O40; Z13

31 pages, January 25, 2005

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