Inter-firm Trust and Access to Financing

All cross-transactions among firms require an element of trust, meaning that in areas where a mutual trust is high, moral hazard problems associated with contract enforcement would be relatively low. This is true even in circumstances where third party enforcement is well institutionalized and market-supporting institutions are more advanced. Although it has rarely been studied empirically, the role of trust on financial development is recognized as one of the important mechanisms through which social capital fosters economic development. In our study, we investigate the association between inter-firm trust and access to bank financing for 11,500 firms across developing and transitional countries. Our empirical analyses suggest that enterprises in countries with high levels of inter-firm trust are more likely to obtain bank loans and less likely to report access to financing as a major obstacle to their business growth. This result remains robust with the inclusion of many controls and various specification checks as well as econometric adjustments for the potential endogeneity of trust and access to financing.