Trust and Financial Development: Forms of Trust and Ethnic Fractionalization Matter

Ali Recayi Ogcem, Ruth Tacneng () and Amine Tarazi
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Ali Recayi Ogcem: LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges
Ruth Tacneng: LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges

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Abstract: We examine the relationship between trust and financial development using detailed regional data in Turkey. We distinguish different forms of trust (i.e., generalized, narrow, and wide) and investigate whether varying degrees of generalized and narrow trust, as well as wide and narrow trust imply different financial development outcomes. Moreover, we assess how different forms of trust and their combination affect financial development in the presence of ethnically fragmented populations. We use instrumental variable (IV) estimations to address endogeneity issues and the potential reverse causality between trust and financial development. Our main results indicate that wide trust has a significantly positive impact on financial development. Moreover, in regions where narrow trust is relatively high, we find financial development benefits from increasing generalized trust. Our findings also highlight that whereas wide trust leads to more developed financial markets in more ethnically fragmented regions, generalized trust plays a stronger role in less fragmented ones. Further, we also analyze the impact of trust on the proportion of credit backed by stable funds such as deposits. Our findings show that generalized trust plays an important role in mitigating the adverse effects that ethnic fractionalization have on the availability of deposits or stable sources to fund loans. On the whole, our study highlights the importance of distinguishing the impact of different forms and combinations of trust. Generalized trust, which is the focus of most studies, is not an all-encompassing one-size-fits-all solution to enhance economic performance.

Keywords: Trust; Financial development; Regional development; Ethnic fractionalization (search for similar items in EconPapers)
Date: 2021-08-19
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-isf, nep-soc and nep-ure
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