Institutions of economic freedom and generalized trust: evidence from the Eurobarometer surveys

We investigate the correlation between institutions of economic freedom and generalized trust. The data we use are derived from the Eurobarometer surveys and measure how trustworthy nationals of a particular country are in the eyes of nationals of other countries. By using these data we avoid the presence of double causality between institutions of economic freedom and generalized trust that has been recognized as a major challenge in the literature. Indeed, external perceptions of trustworthiness are exogenous to the internal institutional building process. We find that during the 1980s and 1990s a 10% increase in the Economic Freedom of the World Index was associated with a 2.5% increase in generalized trust in the countries in our sample.