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Trust, Business Group Decentralization, and Firm Productivity

Author

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  • Fons-Rosen, Christian
  • Manchin, Miriam
  • Szemeredi, Katalin

Abstract

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.

Suggested Citation

  • Fons-Rosen, Christian & Manchin, Miriam & Szemeredi, Katalin, 2024. "Trust, Business Group Decentralization, and Firm Productivity," CEPR Discussion Papers 19417, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19417
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    More about this item

    Keywords

    Trust;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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