Why It Matters What People Think: Colonization, Legal Origins and the Deep Roots of Trust
54 Pages Posted: 2 Oct 2014 Last revised: 4 Dec 2014
Date Written: December 3, 2014
This paper deals with the direction of causality between culture and formal institutions. It does so by analysing the causal relationship between legal origins (institutions) and trust (culture). It empirically investigates the deep historical roots of trust by constructing a proxy for the persistent component of trust. By making use of these persistent trust scores, and drawing on information about the exogenous or endogenous introduction of legal origins, it assesses whether trust is endogenous or exogenous to institutions or whether there is a two-way causality between both variables as it is suggested by recent theoretical studies. Here, it provides evidence that: (i) countries for which legal origins are endogenous developed different legal institutions depending on their persistent (ex-ante) trust values; and (ii) that the effects of an exogenous introduction of legal origins (through e.g. colonization) vary depending on persistent trust levels. In consequence, it concludes that there is a complex two-way causality between trust and legal origins. This result has important policy consequences, since it means that institutional change can be successful in the long-run only if it takes into account the already existing culture in the affected countries.
Keywords: Trust, Legal Origins, Colonization, Institutions, Causality, Deep Rooted Factors of Development
JEL Classification: DO2, K40, N10, O10, Z10
Suggested Citation: Suggested Citation