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Trust in transition: cross-country and firm evidence

  • Martin Raiser

    (European Bank of Reconstruction and Development)

  • Alan Rousso

    ()

    (European Bank of Reconstruction and Development)

  • Franklin Steves

    ()

    (European Bank of Reconstruction and Development)

This paper uses data from a large survey of firms across 26 transition countries to examine the determinants of trust in the transition process. We first introduce a new measure of trust between firms: the level of prepayment demanded by suppliers from their customers in advance of delivery. Using this new measure, we confirm earlier findings that trust is higher where firms have confidence in third party enforcement through the legal system. However, the fairness and honesty of the courts are more important determinants of inter-firm trust than the courts’ efficiency or ability to enforce decisions. We then examine the role of business networks in building trust and find that networks based around personal ties – family and friends – and business associations actively promote the development of trust, while business networks based on enterprise insiders and government agencies do not. Finally, we find that country-level effects are significantly more important determinants of inter-firm trust than firmlevel effects.

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Paper provided by European Bank for Reconstruction and Development, Office of the Chief Economist in its series Working Papers with number 82.

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Length: 22 pages
Date of creation: Oct 2003
Date of revision:
Publication status: Published in M.Raiser, A.Rousso, F.Steves U. Teksoz (2008), Journal of Law, Economics and Organization, 24(2), pp.407-433
Handle: RePEc:ebd:wpaper:82
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Web page: http://www.ebrd.com/pages/research/publications/workingpapers.shtml

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  1. Edward L. Glaeser & Jose Scheinkman & Andrei Shleifer, 2002. "The Injustice of Inequality," Harvard Institute of Economic Research Working Papers 1967, Harvard - Institute of Economic Research.
  2. Johnson, Simon & McMillan, John & Woodruff, Christopher, 1999. "Contract Enforcement in Transition," CEPR Discussion Papers 2081, C.E.P.R. Discussion Papers.
  3. Knack, Stephen & Keefer, Philip, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1251-88, November.
  4. John McMillan & Christopher Woodruff, 1998. "Interfirm Relationships and Informal Credit in Vietnam," William Davidson Institute Working Papers Series 132, William Davidson Institute at the University of Michigan.
  5. Blanchard, O & Kremer, M, 1996. "Disorganization," Working papers 96-30, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Simon Johnson & John McMillan & Christopher Woodruff, 2001. "Courts and Relational Contracts," NBER Working Papers 8572, National Bureau of Economic Research, Inc.
  7. Kornai, Janos, 1993. "The Evolution of Financial Discipline under the Postsocialist System," Kyklos, Wiley Blackwell, vol. 46(3), pages 315-36.
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