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Public trust, the law, and financial investment

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  • Carlin, Bruce Ian
  • Dorobantu, Florin
  • Viswanathan, S.

Abstract

How does trust evolve in markets? What is the optimal level of regulation and how does this affect trust formation and economic growth? In a theoretical model, we analyze these questions, given the value of social capital and the potential for growth in the market. When social capital is valuable, regulation and trustfulness are substitutes. In this case, regulation may cause lower aggregate investment and decreased economic growth. When the social capital is less valuable, regulation and trustfulness may be complements. In the paper, we analyze the optimal level of regulation and highlight the novel predictions of the model.

Suggested Citation

  • Carlin, Bruce Ian & Dorobantu, Florin & Viswanathan, S., 2009. "Public trust, the law, and financial investment," Journal of Financial Economics, Elsevier, vol. 92(3), pages 321-341, June.
    • Handle: RePEc:eee:jfinec:v:92:y:2009:i:3:p:321-341
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    Keywords

    Trust Regulation Economic growth;

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