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Understanding Trust Dynamics in Transition Economies: Insights from BEEPS Survey

This paper analyzes the determinants of trust in transition economies using BEEPS 2002 data, focusing on courts, networks, and prepayment as measures. It explores how courts, networks, and prepayment influence trust at firm and country levels, shedding light on the role of justice, relational contracting, and networks in building trust. The study provides valuable insights on trust dynamics in transitioning economies.

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Understanding Trust Dynamics in Transition Economies: Insights from BEEPS Survey

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  1. Measures and Determinants of Trust in TransitionMartin RaiserAlan RoussoFranklin StevesOffice of the Chief Economist

  2. Existing 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

  3. This 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

  4. The 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

  5. Cross country averages

  6. Determinants 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”

  7. 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

  8. Determinants of prepayment (Cont.) 3. Networks • Source of information on main customer: family/friends, firm insiders, outside sources • Moral attitudes: generalised trust (WVS)

  9. Cross country evidence: simple correlations

  10. Firm - country evidence

  11. Firm - country evidence cont.

  12. Summary 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)

  13. Networks 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

  14. Future research • Why and how does “justice” of courts matter – the role of capture and influence? • Characteristics of different enterprise networks

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