Disentangling the effect of Trust on Bank Lending

Abstract

This paper studies 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 Out-group trust is positively and significantly associated with bank lending. A closer look shows that this ef-fect only holds in countries with relatively lower levels of formal institutional and judicial development. As for In-group trust, we find that its influence on bank lending is depen-dent on the level of informal lending available in each country. Overall, this paper provides novel evidence on the importance of trust and the different mechanisms by which it in-fluences bank lending around the world. (c) 2023 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license ( http://creativecommons.org/licenses/by/4.0/ )