Disentangling the Effect of Trust on Bank Lending

27 Pages Posted: 13 Dec 2019

See all articles by Christina Nicolas

Christina Nicolas

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE); Haute Ecole de Gestion de Geneve (HEG)

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Date Written: November 27, 2019

Abstract

This paper examines the effect of trust on bank lending using a sample of commercial banks in 34 countries around the world. We distinguish between two forms of trust: In-group trust, which we define as the trust in people we know, and Out-group trust, which we define as the trust in people we meet for the first time. We find that that Out-group trust significantly boosts bank lending. A closer look shows that this effect only holds in countries with relatively lower levels of institutional and judicial development. As for In-group trust, we find that it affects bank lending indirectly by favoring the development of informal lending. Overall, this paper provides novel evidence on the importance of trust and the mechanisms by which it influences bank lending around the world.

Keywords: Bank Lending, Trust, Institutional Development

JEL Classification: G21, G28, G32

Suggested Citation

Nicolas, Christina and Tarazi, Amine, Disentangling the Effect of Trust on Bank Lending (November 27, 2019). Available at SSRN: https://ssrn.com/abstract=3494286 or http://dx.doi.org/10.2139/ssrn.3494286

Christina Nicolas (Contact Author)

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

Haute Ecole de Gestion de Geneve (HEG) ( email )

Rue de la Tambourine 17
Carouge, 1227
Switzerland

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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