Wednesday, January 21, 2009

Vicious circles

In a new NBER working paper (ungated version here), Aghion, Algan, Cahuc, & Shleifer show that there is a negative correlation between social trust and government regulation across countries. They also argue that this comes from the demand side (that is that distrustful people demand more regulation) and that it comes even when the demanders know that the government providing the regulation is corrupt. As they put it:

"Using the World Values Survey, we show both in a cross-section of countries,
and in a sample of individuals from around the world, that distrust fuels support for government control over the economy. What is perhaps most interesting about this fi…nding, and also consistent with the model's predictions, 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."

In their model an "uncivic" entrepreneur is one who will create negative externalities when doing his/her entreprenuring.