The Impact of Trust on Intra-Industry Resource Allocation and Aggregate Variables

Abstract

This paper explores the relationship between firm expansion and job creation, focusing on how it contributes to overall income growth. It highlights the crucial factor of profitability in entrepreneurial decision to expand their firms. Various influences on this decision are discussed, with emphasizing trust. The paper argues that the dynamism of small firms plays a role in shaping the endogenous distribution of firm sizes. Trust is identified as a significant determinant of this dynamism. Employing a monopoly-competition model, the paper demonstrates that higher-ability entrepreneurs tend to select firm expansion. The model predicts a distinct pattern in the distribution of firm sizes, characterized by a cut-off point where entrepreneurs are classified. When the trust level is higher, entrepreneurs have greater incentives to expand their firms, resulting in a larger population of large firms and increased aggregate income. The paper concludes with a policy implication, suggesting that governments should strive to create a higher level of trust conducive to firm expansion if their objective is to boost aggregate income. Overall, this paper contributes to the existing literature on entrepreneurship and firm-size distribution.