Trust, Credibility and Delegation: Evidence from Multiple Employees per Establishment

Abstract

Using a unique matched survey of employees and establishments, we examine the relationship between delegation of decision-making authority and individual worker's trust of management. Utilizing a fixed-effects approach to control for unobserved management quality and establishment characteristics, we find that delegation of authority is more likely if a worker trusts management. This result is consistent with the theoretical literature on delegation; in particular, when contracts are incomplete (as in a relational contract), trust between a principal and an agent can sustain delegation when it would not otherwise be possible. We consider a number of alternative specifications including instrumental variables and between-firm estimates. Both extensions yield results qualitatively consistent with the base model.

Keywords: decision-making authority, decentralization, trust

JEL Classification: D23, L22, L23