ALESSANDRA CASSAR, GIOVANNA D’ADDA, AND PAULINE GROSJEAN
Abstract: We examine the causal effect of legal institutional quality on informal norms of cooperation and study the interaction of institutions and culture in sustaining economic exchange. A total of 346 subjects in Italy and Kosovo played a market game under different and randomly allocated institutional treatments, which generated different incentives to behave honestly, preceded and followed by a noncontractible and nonenforceable trust game. Significant increases in individual trust and trustworthiness followed exposure to better institutions. A 1-percentage-point reduction in the probability of facing a dishonest partner in the market game, which is induced by the quality of legal institutions, increases trust by 7–11 percent and trustworthiness by 13–19 percent. This suggests that moral norms of cooperative behavior can follow improvements in formal institutional quality. Cultural origin, initial trust, and trustworthiness influence opportunistic behavior in markets, but only in the absence of strong formal institutions.