Trust, Business Group Decentralization, and Firm Productivity

Christian Fons-Rosen, Miriam Manchin and Katalin Szemeredi

No 19417, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper evaluates how trust among affiliates determines the structure of business groups and, in turn, shapes firm productivity. After confirming that greater business group verticality is a desirable trait as it is associated with higher firm productivity, we develop a theoretical model on how bilateral trust impacts group verticality. Testing our predictions on a large European sample, we find that business groups with higher average trust between members have more vertical and complex structures. In addition, firm-level estimations reveal that being a trustworthy affiliate in the business group correlates both with being located in a layer closer to the headquarter and also with greater firm productivity. Results are robust to using somatic and linguistic distance as instruments for bilateral trust.

Keywords: Trust (search for similar items in EconPapers)
JEL-codes: F23 L21 L22 M14 (search for similar items in EconPapers)
Date: 2024-08
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