Law and Trust

Abstract

This survey addresses the question of whether strong legal enforcement crowds out or in the amount of trust in a society. The author reviews the empirical studies in the literature on macroeconomics, inter-firm cooperation and laboratory experiments, finding that mandatory legal rules, especially formal contracts, normally undermine trust except when they are perceived as legitimate, or there are no strong social norms of fairness (i.e. the population in a society is considerably heterogeneous), or the environment in which repeated commercial relationships take place becomes highly uncertain.