Modelling trust evolution within small business lending relationships

Ying Tang,Andrea Moro,Zhiyong Li,Sandro Sozzo

doi:10.1186/s40854-018-0105-1

Abstract

Trust is a key dimension in the principal-agent relationship and it has been studied extensively. However, the dynamics, evolution, and intrinsic motivation and mechanisms have received less attention. This paper investigates the intrinsic motivation of trust and it proposes a theoretical model of trust evolution that is based on the notion of ‘trust response’ and ‘trust spiral’. We then specifically focus on trust within the lending relationship between banks and small businesses, and we run numerical simulations to further illustrate the evolution of involved mutual trust over time. Our model provides implications for future research in both trust evolution and small business lending relationships.

Highlights

Since the 1990s, trust has received considerable attention across many disciplines, ranging from psychology to economics
This paper develops an evolving model of trust based on the notions of ‘trust response’ (Pettit, 1995) and ‘trust spiral’ (Nooteboom, 2002)
After analysing the motivation of trust and trust propensity, we further propose a new trust utility function that will be used as the basis of a trust spiral model

Summary

Introduction

Since the 1990s, trust has received considerable attention across many disciplines, ranging from psychology to economics. A large quantity of literature has studied fairness and social welfare in human decision making and has found that theories of reciprocity and altruism provide supportive explanations for these non-selfish behaviours (Fehr and Schmidt, 2006). After analysing the motivation of trust and trust propensity, we further propose a new trust utility function that will be used as the basis of a trust spiral model. The development of trust in this paper is transformed into the evolution of trust propensity along with time t. Our main standpoint lies in the fact that behavioural trust is driven by potential motivations and is caused by trust antecedents on the basis of the subjective perception of trust, as supported by Das and Teng (2004)

Objectives

Conclusion