DP19417 Trust, Business Group Decentralization, and Firm Productivity
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.
