Distrust and regulation

Trust and regulation are substitutes. A society can work well with one or the other. Hence, a society with a high level of mutual trust should have a low demand for regulation, and vice versa. This is what a new NBER paper models and documents. In their words, it explains why it is that people in countries with bad governments want more government intervention.

But causality is circular, as always, as culture shapes institutions, and institutions shape culture.“Compared to the English colonies, the more heavily regulated French colonies over the decades have developed lower levels of trust (because of a more controlling role of the state) and that this lower trust has generated continued demand for government regulation.”

The most interesting point they make is that “distrust generates demand for regulation even when people realize that the government is corrupt and ineffective; they prefer state control to unbridled activity by uncivic entrepreneurs.” Indeed, in developing countries, voters dislike capitalism because it is associated with high levels of corruption and, also, demand for regulation results from perceived unfairness of the existing social order.

Between rich and poor countries this seems quite obvious, but what about across rich countries? Well, they suggest that regulation, here minimum wage policies, undermine the ability of firms and workers to learn about each others’ cooperative attitudes, and that low cooperation in turns creates a demand for wage policies, as shown below!