The formal and informal institutional framework of capital accumulation

- We study the impact of trust and formal legal institutions on investment in a panel of countries.
- Both social trust and the quality of formal legal institutions have a positive impact on capital accumulation.
- Social trust and the quality of formal legal institutions are substitutes.
- These findings apply both to total investment and to foreign direct investment.

This paper studies the impact of social trust and formal legal institutions on capital accumulation in a panel of countries. The results not only confirm that both social trust and the quality of formal legal institutions have a positive impact on capital accumulation, but also show that they are substitutes. Specifically, the impact on capital accumulation of an upgrade of the quality of formal legal institutions is larger when social trust is low than when social trust is high, and vice versa. These findings apply both to total investment and to its foreign component, foreign direct investment.