Regulation and Distrust Philippe Aghion, Yann Algan, Pierre Cahuc, Andrei Shleifer In a cross-section of countries, government regulation is strongly negatively correlated with social capital. We document this correlation and present a model explaining it. In the model, distrust creates public demand for regulation, while regulation in turn discourages social capital accumulation, leading to multiple equilibria. A key implication of the model is that individuals in low trust countries want more government intervention even though the government is corrupt. We test this and other implications of the model using country- and individual-level data on social capital and beliefs about government's role, as well as on changes in beliefs and in trust during the transition from socialism. The model explains the correlation between regulation and distrust, but also has a number of additional implications, which we bring to the data. The model predicts, most immediately, that distrust influences not just regulation itself, but also the demand for regulation. Using the World Values Survey, we show both in a cross-section of countries, and in a sample of individuals from around the world, that 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 activity by uncivic entrepreneurs. The most fundamental implication of the model, however, is that culture (as measured by distrust) and institutions (as measured by regulation) coevolve. Culture shapes institutions, and institutions shape culture. Unfortunately, it is difficult to test this prediction of the model using instrumental variables, since many exogenous factors that influence trust might also directly influence regulation, and vice versa. We take the evidence on the demand for regulation as consistent with, if not proving, causality running from distrust to regulation. To consider whether regulation influences trust, we look at the experiment of transition from socialism, which we interpret as a radical reduction in government control 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 in trust in the short run. We present evidence supporting these predictions using the World Values Survey and the Life in Transition Survey, the latter devoted to former socialist economies. Although our paper combines ideas about regulation and distrust in an apparently novel way, it follows a large literature on related topics. Following Banfield (1958), Gam-beta (1988) and Coleman (1990), Putnam (1993) reinvigorated research on social capital by showing tremendous dispersion of levels of trust and social capital across Italian regions as well as the ability of social capital measures to predict government performance. Knack andRegulation and Distrust Philippe Aghion, Yann Algan, Pierre Cahuc, Andrei Shleifer In a cross-section of countries, government regulation is strongly negatively correlated with social capital. We document this correlation and present a model explaining it. In the model, distrust creates public demand for regulation, while regulation in turn discourages social capital accumulation, leading to multiple equilibria. A key implication of the model is that individuals in low trust countries want more government intervention even though the government is corrupt. We test this and other implications of the model using country- and individual-level data on social capital and beliefs about government's role, as well as on changes in beliefs and in trust during the transition from socialism. The model explains the correlation between regulation and distrust, but also has a number of additional implications, which we bring to the data. The model predicts, most immediately, that distrust influences not just regulation itself, but also the demand for regulation. Using the World Values Survey, we show both in a cross-section of countries, and in a sample of individuals from around the world, that 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 activity by uncivic entrepreneurs. The most fundamental implication of the model, however, is that culture (as measured by distrust) and institutions (as measured by regulation) coevolve. Culture shapes institutions, and institutions shape culture. Unfortunately, it is difficult to test this prediction of the model using instrumental variables, since many exogenous factors that influence trust might also directly influence regulation, and vice versa. We take the evidence on the demand for regulation as consistent with, if not proving, causality running from distrust to regulation. To consider whether regulation influences trust, we look at the experiment of transition from socialism, which we interpret as a radical reduction in government control 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 in trust in the short run. We present evidence supporting these predictions using the World Values Survey and the Life in Transition Survey, the latter devoted to former socialist economies. Although our paper combines ideas about regulation and distrust in an apparently novel way, it follows a large literature on related topics. Following Banfield (1958), Gam-beta (1988) and Coleman (1990), Putnam (1993) reinvigorated research on social capital by showing tremendous dispersion of levels of trust and social capital across Italian regions as well as the ability of social capital measures to predict government performance. Knack and