Law, Informal Institutions and Trust

Abstract

This survey addresses the question of whether formal legal enforcement crowds out or crowds in the amount of trust in a society. Based on a review of relevant empirical studies in the literature on macroeconomics, inter-firm cooperation and laboratory experiments, it can be concluded that find that formal legal mechanisms, especially formal contracts backed by a powerful authority, normally work as substitutes for trust, rather than complements, except when they are perceived as legitimate, or when there are no strong social norms of fairness (i.e. the population in a society is considerably heterogeneous), or when the environment