Trust and Financial Development: Forms of Trust and Ethnic Fractionalization Matter

34 Pages Posted: 20 Jul 2021

See all articles by Ali Recayi Ogcem

Ali Recayi Ogcem

Université de Limoges, LAPE

Ruth C. Tacneng

Université de Limoges, LAPE

Amine Tarazi

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE); University of Limoges - Faculty of Law and Economic Science

Date Written: July 15, 2021

Abstract

We examine the relationship between trust and financial development using detailed regional data in Turkey. We distinguish different forms of trust (i.e., generalized, narrow, and wide) and investigate whether varying degrees of generalized and narrow trust, as well as wide and narrow trust imply different financial development outcomes. Moreover, we assess how different forms of trust and their combination affect financial development in the presence of ethnically fragmented populations. We use instrumental variable (IV) estimations to address endogeneity issues and the potential reverse causality between trust and financial development. Our main results indicate that wide trust has a significantly positive impact on financial development. Moreover, in regions where narrow trust is relatively high, we find financial development benefits from increasing generalized trust. Our findings also highlight that whereas wide trust leads to more developed financial markets in more ethnically fragmented regions, generalized trust plays a stronger role in less fragmented ones. Further, we also analyze the impact of trust on the proportion of credit backed by stable funds such as deposits. Our findings show that generalized trust plays an important role in mitigating the adverse effects that ethnic fractionalization have on the availability of deposits or stable sources to fund loans. On the whole, our study highlights the importance of distinguishing the impact of different forms and combinations of trust. Generalized trust, which is the focus of most studies, is not an all-encompassing one-size-fits-all solution to enhance economic performance.

Keywords: Trust, Financial development, Regional development, Ethnic fractionalization

JEL Classification: G21, G28, O16, Z13

Suggested Citation

Ogcem, Ali Recayi and Tacneng, Ruth C. and Tarazi, Amine, Trust and Financial Development: Forms of Trust and Ethnic Fractionalization Matter (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=3888982 or http://dx.doi.org/10.2139/ssrn.3888982

Ali Recayi Ogcem (Contact Author)

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France
+33 662939260 (Phone)
87000 (Fax)

Ruth C. Tacneng

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Amine Tarazi

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

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

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

5 rue Felix Eboue
Limoges, 87000
France

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