Regulation and Distrust

by on August 9, 2008 at 6:46 am in Political Science | Permalink

Brought to you by Aghion, Algan, Cahuc and Shleifer, this is one of the best papers so far this year.  It’s so good I’ll give you a longer than usual quotation from the opening pages:

In a cross-section of countries, government regulation is strongly negatively correlated with social capital. We document, and try to explain, this highly significant empirical correlation.  The correlation works for a range of measures of social capital, from trust in others to trust in corporations and political institutions, as well as for a range of measures of regulation, from product markets, to labor markets, to judicial procedures. 

We present a simple model explaining this correlation. The model turns on the idea that investment in social capital makes people both more productive and more civic (e.g., Coleman 1990). Compared to people who have invested in social capital, those who have not are both less productive and impose a negative externality on others when they produce (e.g., pollute).  The community (whether through voting or through some other political mechanism) regulates production when the expected negative externalities are large. But regulation itself must be implemented by government officials, who are corrupt if they have not invested in social capital. As a consequence, when production is restricted through regulation, investment in social capital may not pay off.  In this model, when people expect to live in a civil community, they expect low levels of regulation, and so invest in social capital. Their beliefs are justified, as lack of investment leads to incivility, high regulation, high corruption, and low production.  The model has two Pareto ranked equilibria.

…The model predicts, most immediately, that distrust influences not just regulation itself, but the demand for regulation…distrust fuels support for government control over the economy.  What is perhaps most interesting about this finding, 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 production by uncivil firms.

…We take evidence on the demand for regulation as supportive of causality running from distrust to regulation.  To test the reverse causality, we look at the experiment of transition from socialism, which we interpret as a radical reduction in government regulation in low trust societies.  Our model predicts that such a reduction should lead to 1) a reduction in output, 2) an increase in corruption, 3) an increase in demand for government control at a given level of trust, and 4) a reduction of trust in the short run.

1 E. Barandiaran August 9, 2008 at 9:08 am

You may want to use the idea of trust (social capital) for your ESEADE lecture in Buenos Aires. Since the announced title of your lecture is The Culture Foundations of a Free Society (a very Hayekian title in accordance with ESEADE tradition), you may use trust as a proxy for culture and relate it to the conditions under which regulation is detrimental to a free society.

I’m sure this would be more interesting for an ESEADE audience than any of the “casual” topics listed in your post yesterday (by the way, since they know you are going to dress casually, they want you to be elegant).

2 es32 August 9, 2008 at 1:43 pm

It looks like if you look only at Western European/US/UK countries the conclusions fall apart. (I don’t have the raw data to tell.) I wonder if this is then really a statement about the difference between cultures rather than a statement about regulation vs. social capital. I would be interesting to see the study after controlling for cultural heritage. Adding all the African countries might lead to some interesting changes in results as well.

All in all an interesting paper, but needs a little work.

3 Fred Thompson August 9, 2008 at 2:38 pm

Aghion, Algan, Cahuc and Shleifer make an intuitively plausible argument, but I am not entirely convinced by their results. At a minimum, they must show a strong link between distrust and preference for government regulation of the market at the individual level. Frankly, their micro analysis using world values survey data doesn’t do that. Moreover, I am not persuaded that there aren’t common cultural values that underlie investment in human capital, trust in others, and preference for government regulation. My hunch is that these measures tend to work better than trust at explaining attitudes toward public policy and would be far less fraught with problems of causal direction. See for example:

John Gastil, Donald Braman, Dan M. Kahan, and Paul Slovic, The ‘Wildavsky Heuristic’: The Cultural Orientation of Mass Political Opinion (October 15, 2005). Yale Law School, Public Law Working Paper No. 107.
Available at SSRN: http://ssrn.com/abstract=834264

Richard A. Ellis and Fred Thompson, Culture and Environment in the Pacific Northwest. American Political Science Review, Vol. 91, No. 4, pp. 885-897, December 1997. Available at SSRN: http://ssrn.com/abstract=1123672

Having said that, I would be overjoyed to have this paper or papers like it submitted to the comparative statistics section of the Journal of Comparative Policy Analysis, which I edit. http://www.jcpa.ca/icpaf/calls/

4 TGGP August 10, 2008 at 5:33 pm

Reminds me of this from Caplan.

5 Barkley Rosser August 11, 2008 at 6:11 pm

Good lord. Here we go again with more overpraise
of half-baked stuff coming out of Shleifer and gang.

Just a couple of points.

1) If regulation leads to distrust, then why does a massive
reduction in regulation in the transition economies lead to
an increase in distrust? They say their model predicts this,
but I see nothing in their model that does so.

2) There is talk of how rising distrust leads to “leftist political
movements and a demand for more government.” But then we have
places like Sweden being the good guys with little regulation
and low distrust. Does this mean that Sweden is “rightist”?

3) As usual, this gang ignores income distribution, which is
strongly connected to several of these variables. Leaving it
out skews the results badly (see Ahmed, Rosser, and Rosser,
“A Global Perspective on the Non-Observed Economy, Income
Distribution, Social Capital, and Corruption,” available at
http://cob.jmu.edu/rosserjb).

I could go on, but I need to go home and cook dinner for my
family, but I must say that if this is the best paper of the
year, them I am my grandmother’s uncle. Gag.

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