Regulation, Trust, and Corporate Social Responsibility: Are They Complements?

Fernando Gomez (Pompeu Fabra Barcelona)
Aleix Calveras (University Illes Balears)
Juan Jose Ganuza (Pompeu Fabra Barcelona)

Abstract

The prevailing view in the literature interested in the connection between regulation and
trust in a given society favors the view that the thickness of regulation and prevailing
levels of trust are negatively correlated (see Aghion et al. (2010)). This paper highlights
instead that between trust, the enforcement of regulation, and corporate social responsibility
(CSR) a positive complementarity may exist under plausible circumstances. Using
a relational contracting approach, we show that regulatory enforcement reduces the misalignment
of incentives between a firm and its consumers, making it easier for trust and
CSR to endogenously arise.

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