Working Paper: NBER ID: w16923
Authors: Laura Bottazzi; Marco Da Rin; Thomas F. Hellmann
Abstract: We examine the effect of trust on financial investment and contracting decisions in a micro-economic environment where trust is exogenous. Using hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. The national identity of venture capital firms' individual partners further contributes to the effect of trust. Education and work experience reduce the effect of trust but do not eliminate it. We also examine the relationship between trust and sophisticated contracts involving contingent control rights and find that, even after controlling for endogeneity, they are complements, not substitutes.
Keywords: Trust; Investment; Venture Capital; Contracting
JEL Codes: G24; L14; M13; O16; Z1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher generalized trust (Z13) | likelihood of investment (G11) |
| presence of foreign partners with higher trust levels (F23) | likelihood of investment (G11) |
| higher trust (Z13) | use of sophisticated contracts (D86) |
| trust (G21) | investment outcomes (G11) |