Endogenous Institutional Selection, Building Trust, and Economic Growth
Abstract: Private-order market institutions founded on trust-based relational contracts suffer adverse selection and moral hazard problems, while public-order market institutions have a limited capacity to enforce contracts. We model agent selection between contract enforcement institutions and demonstrate that the state's contract enforcement capacity is complementary to private-order contract enforcement institutions. This suggests that improvements to public-order institutions cause the accumulation of trust and result in economic growth in both institutions. We discuss the robustness of our findings to different political institutions. Our predictions are illustrated by regressing generalized trust against proxies for public-order contract enforcement capacity.
