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Existing literature

Measures and Determinants of Trust in Transition Martin Raiser Alan Rousso Franklin Steves Office of the Chief Economist. Existing literature . McMillan, Woodruff (1999), Johnson, McMillan, Woodruff (1999), Frye (2003); Woodruff (2002) trade credit as measure of trust at firm level

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Existing literature

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  1. Measures and Determinants of Trust in TransitionMartin RaiserAlan RoussoFranklin StevesOffice of the Chief Economist

  2. Existing literature • McMillan, Woodruff (1999), Johnson, McMillan, Woodruff (1999), Frye (2003); Woodruff (2002) • trade credit as measure of trust at firm level • role of courts, substitute for relational contracting => supports market expansion • role of networks – complement to courts?; more important than moral attitudes in building trust among firms

  3. This paper • uses country variation in BEEPS 2002 to examine role of courts, networks • not just firm perceptions but aggregate system – wide effects • divides quality of courts and networks into several dimensions • introduces prepayment as alternative to trade credit – latter may in part be involuntary

  4. The BEEPS • survey in 26 transition economies and Turkey • 170-450 firms per country = 6500 total • mainly private, SME’s, sectorally representative of population (50% services in most countries) • survey of managers – combination of perceptions and (rough) financial data • questions on contracts are not relationship specific but average for firm

  5. Cross country averages

  6. Determinants of prepayment 1. The courts & third party enforcement • Perceptions of fairness, cost, ability to enforce decisions • Experience with using courts, previous contract violations, alternative protection • Quality of law “on the books”

  7. Determinants of prepayment (Cont.) 2. Relational contracting • Length of business relationship • Change in main customer over last 3 years • Types of customers: government, MNC’s, subsidiaries or parent company, local firms

  8. Determinants of prepayment (Cont.) 3. Networks • Source of information on main customer: family/friends, firm insiders, outside sources • Moral attitudes: generalised trust (WVS)

  9. Cross country evidence: simple correlations

  10. Firm - country evidence

  11. Firm - country evidence cont.

  12. Summary of the main results • Importance of the courts at country level => systems effect rather than just firm perceptions (or: perceptions are not that inaccurate) • “Justice” of courts more consistent measure of perceived effectiveness of courts than cost or ability to enforce → link to Glaeser/Shleifer (2002)

  13. Networks matter but not in uniform ways • Networks matter but not in uniform ways • Family networks build trust but remain perhaps more closed • Insider networks do not build trust • Positive role of business associations, Woodruff, Frye • Prepayment better aggregate measure of trust than trade credit: • Less affected by relational contracting • Avoids problem of involuntary trade credit

  14. Future research • Why and how does “justice” of courts matter – the role of capture and influence? • Characteristics of different enterprise networks

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