Trust, Firm Organization and the Structure of Production

Interpersonal trust favors the expansion of organizations by allowing the delegation of decisions and tasks among anonymous others or people that interact only infrequently. We document these facts for a representative survey of Italian manufacturing firms and use this source of data to construct an industry-specific measure of need-for delegation in production. We then show that trust shapes comparative advantage, as high-trust regions and countries exhibit larger value added and export shares in delegation-intensive industries relative to other industries. Such effects are associated with an increase in average firm size, while the number of firms is not significantly affected. Consistent with the idea that trust allows firms to expand beyond the narrow circle of family members and close friends, larger firm size reflects a shift of the size distribution away from the smallest firms and toward the small-to-medium ones