The Market–Promoting and Market–Preserving Role of Social Trust in Reforms of Policies and Institutions

Social trust has been identified as a catalyst for reforms. We take the literature further in two ways. First, we analyze mechanisms through which social trust enables liberalizing reforms—by overcoming obstacles in the political process (stemming from ideology, ideological fractionalization, coalition government, minority government, and legislature-seat instability). Second, we define reforms as distinct changes in the quality of the legal institutions and in the scope of regulation and separate reforms that increase economic freedom in these two areas from reforms that decrease it. We study separately how social trust, interacted with the different types of political hindrances, affects the probability of reforms. We find a dual role of social trust in the political process—facilitating liberalizing reforms and making deliberalizing ones more difficult. This suggests that trust does not make agreement on any reform more probable—the content of the reform is crucial.