Cooperation or Punishment. The Effects of Trust on Government Regulation and Taxation.

Abstract

For many economists government intervention is linked to low levels of interpersonal trust and corruption, while, on the contrary, for many political scientists, government intervention is associ-ated to high trust and low corruption. The goal of this paper is to reconcile these contrasting find-ings by distinguishing the differing effects of trust over two alternative types of government inter-vention: regulation and taxation. Low-trust individuals demand more governmental regulation but less government taxation. We test the hypotheses by focusing on a particular policy – i.e. environ-mental policy – where governments use different mixes of regulatory and tax mechanisms, and for which we have data on both trust in others (interpersonal trust) and trust in public institutions (in-stitutional trust). The main finding is that those individuals with low trust (both interpersonal and institutional trust) tend to demand, ceteris paribus, more governmental regulation of the environ-ment and, but are less inclined to pay higher taxes to protect the environment. We also find that the effect of institutional trust is stronger than the effect of interpersonal trust, which puts previous studies in a perspective.