Regulation, Trust and Corporate Social Responsibility: A Relationship of Complementarity

The dominant perspective in the literature exploring the relationship between regulation and societal trust suggests that there is a negative correlation between the thickness of regulation and the prevailing levels of trust in a society (see Aghion et al., 2010). Our paper highlights instead that a positive complementarity exists under plausible circumstances between trust, the enforcement of regulation, and corporate social responsibility (CSR) or environmental and social (ES) practices. Using a relational contracting approach, we show that regulatory enforcement reduces the misalignment of incentives between firms and consumers, making it easier for trust and CSR to arise endogenously.