Market conditions and firm morality: Employee trust in the honesty of their managers

Abstract

Using establishment-level count data, we investigate the relationship between employee trust of their managers and both: (i) product-market conditions; and (ii) the observability of manager’s actions within the firm. When demand is expanding (contracting), average employee trust of their managers is higher (lower): negative shocks or downturns make it more difficult to keep past promises and reduce trust. Greater product-market competition is associated with higher employee trust of managers. Rather than being a race-to-the-bottom, competition appears to induce managers to be more trustworthy as they seek to access productive trust-based equilibria with their employees. Consistent with the prediction that a trust-based equilibrium is more difficult to sustain with imperfect observability, employees trust management less in larger establishments, in larger firms and when an establishment is not the headquarters of the organization.