Existing evidence shows that trust is correlated with favorable economic outcomes such as GDP growth. Establishing whether trust has a causal effect, however, has been challenging, partly because trust co-varies with institutions that may directly impact trustworthiness and economic outcomes. We provide experimental evidence that trust can causally affect economic outcomes, but that the impact may depend on the institutional environment. We conducted a repeated gift exchange game with principals and agents, and generated an instrument for trust by randomly assigning principals to receive a historical example of past play in which agents were either trustworthy or untrustworthy. We find that if the institutional setting allows reputation formation, a high trust prior of principals leads to the emergence of a stable equilibrium with high prices and high product quality. Principals and agents end up being trapped in an inefficient equilibrium with low prices and low quality, however, if principals start with a low trust prior. Under less favorable institutional environments that do not allow for reputation building or where contract enforcement is weaker and extends to the principals’ obligations, a high trust prior has a weaker impact or no impact at all. Our findings illustrate how positive economic outcomes may depend on having the right combination of trust and institutions.