60 Pages Posted: 16 Feb 2009 Last revised: 4 Aug 2010

Date Written: June 2, 2010

Abstract

This study examines empirically whether individuals consider their perceptions of potential counterparties' trustworthiness when deciding to transact in an environment with extensive contract enforcement mechanisms. This is a non-trivial empirical question because, as observed by Carlin, Dorobantu, and Viswanathan (2009), in the presence of adequate contracts and enforcement mechanisms, trust need not affect market outcomes at all. We find that borrowers who are perceived as less trustworthy are economically and significantly less likely to have their loan requests filled. This result provides support to a growing literature in finance that suggests that trust could play a causal role in stock market participation, the lack of diversification in investors' asset allocation, as well as the pattern of cross-border investments.