The not so dark side of trust: does trust increase the size of the shadow economy?

This paper studies the relationship between the size of the shadow economy and generalized trust, on a cross-section of countries, both developed and developing, and finds that it is significantly negative. That relationship is robust to controlling for a large set of economic, policy, and institutional variables, to changing the estimate of the shadow economy and the estimation period, and to controlling for endogeneity. It is independent from trust in institutions. We provide evidence that it is mainly present in the sample of developing countries. Latest version, September 2011: http://www.solvay.edu/sites/upload/files/CEB_WorkingPapers/LastUpdate/wp08030.pdf