Trust as a catalyst for regional growth in a decentralized Europe: The interplay between informal and formal institutions in driving economic growth

Abstract

Empirical studies examining the interplay between informal and formal institutions on economic growth are scarce. As a result, we do not know how differences in trust affect the economic returns of the quality of regional governments and their autonomy. A panel regression analysis of 208 regions in 21 EU countries shows that informal and formal institutions matter for economic growth, individually and in combination. More specifically, trust substitutes the quality of regional government but does not affect the economic impact of its degree of decentralization. Therefore, policymakers need to think creatively about harnessing institutions to promote economic growth.