Social trust and formal institutions: How do they shape public debt?

Abstract

AbstractThis research investigates the impact of varying levels of social trust across economies on the development of effective formal institutions that serve to determine public debt. Analysing a sample of 95 economies from 2000 to 2020, our econometric results indicate that social trust is a pivotal determinant of public debt. The effect operates indirectly through the quality of various categories of legal system and property rights indicator. In particular, the results reveal that the relationship between social trust and economic‐judicial institutions are complementary to each other. In addition, we also find that countries with higher social trust tend to reduce their primary deficit in the face of higher debt, thereby reducing the likelihood of uncontrollable debt scenarios.