Abstract
We argue that social dilemmas structured as investment trust games are a dominant feature in social and economic life due to asymmetric information, incomplete contracts and non-overlapping competencies that are typical characteristics of business relationships. We therefore consider that borrowers living in geographical areas with higher interpersonal trust are more likely to overcome the coordination failures typical of this kind of social dilemmas, thereby creating higher economic value and reducing the risk of their economic activity. Our empirical findings support this hypothesis, showing that lenders charge significantly lower loan costs on borrowers living in areas characterized by higher interpersonal trust.
Highlights
Trust is the investor’s willingness to make herself vulnerable to others’ action. [1]Citation: Becchetti, L.; Manfredonia, S.; Pisani, F
According to coefficients estimated in our fully-augmented model, a one standard deviation increase in interpersonal trust is associated with a decrease in the bank loan cost of 48 bps
The effect of local social capital on the bank loan cost is larger with respect to the result obtained by Hasan et al [17], which found that a standard deviation increase in social capital is associated with a decrease in the bank loan cost of 12.5 bps
Summary
Trust is the investor’s willingness to make herself vulnerable to others’ action. [1]. Sustainability 2022, 14, 1238 more than she gives) These Pareto superior solutions require interpersonal trust (i.e., the first player chooses a nonzero transfer if she trusts the second player and if the latter is trustworthy) and in the trust investment game perspective, interpersonal trust has a positive and significant effect on the final payoffs of the game. Fogel et al [22] find that the social capital of the CFO is associated with loans with lower spreads and fewer covenants, leading to contracting benefits beyond the impact of direct links between borrowers and lenders They conceive social capital as the privileged position of the CFO in a network of business relationships that gives her an informational advantage and reduces informational asymmetries. Consistently with what we observe in our empirical findings, in the logic of the trust investment game (our theoretical benchmark), trust in the legal system does not eliminate the importance of interpersonal trust since a large part of social and business relationships occur in “grey areas” where violation of trust is not covered by legal contracts and cannot be sanctioned
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
