Measures and Determinants of Trust in Measures and Determinants of Trust in TransitionTransition

Martin RaiserMartin RaiserAlan RoussoAlan Rousso

Franklin StevesFranklin Steves

Office of the Chief EconomistOffice of the Chief Economist

Existing literatureExisting 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

This paperThis 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

The BEEPSThe 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

Cross country averagesCross country averages

0

10

20

30

40

50

60

Belaru

s

Uzb

ekistan

Azerb

aijan

Kazak

hstan

Yu

goslavia

Lith

uan

ia

BiH

FY

RO

M

Sloven

ia

Hu

ngary

Bu

lgaria

Eston

ia

Polan

d

Prepayment Trade Credit

Determinants of prepaymentDeterminants 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”

Determinants of prepayment (Cont.)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

Determinants of prepayment (Cont.)Determinants of prepayment (Cont.)

3. Networks

Source of information on main customer: family/friends, firm insiders, outside sources

Moral attitudes: generalised trust (WVS)

Cross country evidence: simple correlationsCross country evidence: simple correlationsPrepayment Trade credit

EBRD ref. -0.71* 0.27

Rule of Law -0.76* 0.23

Legal Ext. -0.54* 0.43*

Court just. -0.62* 0.38*

Court cost 0.30 0.42*

Court enf. 0.06 0.03

Networks ge. -0.13 0.02

Family -0.24 -0.31

Insiders 0.63* 0.14

Bus. Ass. -0.51* -0.04

Legal Trans-plant -0.71* 0.36*

Gen. Trust 0.37* -0.16

Firm - country evidenceFirm - country evidencePrepayment Trade credit

General reform environment

Transplant -13.9*** 15.2**

Legal Ext. -7.2*** 4.3***

Perception of Courts

Court fairness - 0.34 0.74

-20.2*** -1.60

Court cost -0.03 1.29**

19.2*** 43.5***

Court enforcement 0.62 -1.46***

7.5*** -21.6***

Experience

Payment delays -1.12 12.4***

Security payments 0.19 -0.86

Protection payments -1.29 0.03

Prepayment Trade credit

Relational Contracts

Sales to customers >3 years -0.76 4.0***

Change of major customer 2.0** 1.87

Sales to government -0.02 0.08***

Sales to MNC’s -0.03 0.13***

Sales to subsidiary/parents 0.02 0.05*

Sales to other dom. 0.02 0.10***

Networks

General -0.18 0.36

3.45** -6.15***

Family -0.74* -1.05**

-31.2*** -3.02***

Insiders 0.74* -0.51

3.46 -9.97***

Firm - country evidence cont.Firm - country evidence cont.

Summary of the main resultsSummary 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)

Networks matter but not in uniform waysNetworks 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

Future researchFuture research

Why and how does “justice” of courts matter – the role of capture and influence?

Characteristics of different enterprise networks