Government regulation of firms is associated with more negative externalities and unofficial activity across countries. In this paper I argue that this correlation mainly reflects causality going from concerns about market failures to demand for government intervention. Using trust in others as a proxy for such concerns, I first show that differences in trust explain a great deal of variation in entry regulations. Then, controlling for average trust in the regression of market failures on

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... tion, the latter is no longer associated with worse economic outcomes. The same result is confirmed when I exploit an alternative source of variation in regulation that is independent of trust, namely country population.