Galassi, Francesco L. and Newton, Lucy (2001) My word is my bond: reputation as collateral in nineteenth century English provincial banking. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers.

Preview

PDF WRAP_Galassi_twerp599.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader Download (119Kb)

Abstract

There are few real-world economic transactions that do not involve an element of trust, yet in textbook economics trust is not prominently discussed. In that world, perfectly informed and computationally endowed agents reach optimal, enforceable decisions in continuously harmonising exchanges. Trust is therefore linked to deviations from the textbook ideal: incomplete information, costly enforcement, and computational limitations faced by agents. Trust can then be thought of as an algorithm, in other words, a way of resolving uncertainty in a complex world. In this sense trust may be seen as a form of expectation concerning the behaviour of other agents whose actions and intentions cannot be (fully) observed. This paper pursues this approach by “running the algorithm backwards” and trying to establish what factors led a 19th century provincial English bank to trust different loan applicants. Using a data-set of some 200 loan decisions, and knowing the size of collateral (if any) requested, we develop a method to estimate the probability that the bank attached to each borrower’s promise to repay (i.e., the trust the bank had towards the borrower), adjusting for stages in the business cycle. We then regress this estimated probability on a variety of observable borrower characteristics. We find that trust is not correlated with a priori expected variables, such as borrower’s assets or frequency of interaction. This suggests that trust was built up in other interactions, possibly through social or religious networks, and that the banking relationship reflected information available to bank directors other than what was purely pertinent to the borrowers’ economic conditions. This has strong implications for the allocation of credit to industry in 19th century England.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Banks and banking -- England -- History, Trust -- England, Social status -- England -- History, Uncertainty, England -- Economic conditions -- 19th century
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	June 2001
Number:	No.599
Number of Pages:	45
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
References:	Alesina, A., and La Ferrara, E. (2001): ‘Who trusts others?’ Journal of Public Economics. Axelrod, R. The Evolution of Co-operation (New York, 1984) Barney, J. B., and Hansen, M .H., ‘Trustworthiness as a source of competitive advantage’, Strategic Management Journal, 1994, Vol. 15, pp. 175-190. Brealey, R.A. and S.C. Myers, Principles of corporate finance (1996). Capie, F. and Collins, M. ‘Industrial lending by English commercial banks, 1860s-1914: why did banks refuse loans?’ Business History, 38 (1), 1996. Capie, F. and Collins, M., ‘Banks, industry and finance, 1880-1914’, Business History, 41 (1), 1999: 37-62. Casson, M. Enterprise and competitiveness: a systems view of international business (Oxford, 1990) Casson, M., ‘Moral constraints on strategic behaviour’ in S. E. G. Lea, P. Webley & B. M. Young (eds) New directions in economic psychology: theory, experiment and application (Aldershot, 1992). Clark, K., and Sefton, M., (2001): ‘The sequential prisoner’s dilemma: evidence on reciprocation.’ Economic Journal, January. Carnevali, Francesca (1996), ‘Between Markets and Networks: Regional Banks in Italy’, Business History , Vol. 38, No. 3. Coco, G. (2000). ‘On the use of collateral’. Journal of Economic Surveys. 14, 2 (April). 191-214. Collins, M. and Hudson, P., ‘Provincial Bank Lending: Yorkshire and Merseyside 1826-60’, Bulletin of Economic Research Vol. 31 (1979); Coleman, J., Foundations of social theory (Cambridge, MA, 1990) Cottrell, P. L. and Newton, L. (1999), ‘Banking Liberalisation in England and Wales, 1826-1844’ in Tilly, R. & Sylla, R. (eds), The State, financial systems and economic modernisation, CUP, Cambridge. Crick, W. F. and Wadsworth, J. E. (1936), A Hundred Years of Joint Stock Banking, London. Dasgupta, P. (1988). Trust as a commodity. In D.Gambetta. Trust Oxford: Blackwell. Deutsch, M., ‘Trust and suspicion’, Journal of Conflict Resolution, 2, 1958: 265-279. Doney, P. M., and Cannon, J. p., ‘An examination of the nature of trust in buyer-seller relationships’, Journal of Marketing, 61 (2), April 1997: 35-51. Dore, R. ‘Goodwill and the spirit of market capitalism’ British Journal of Sociology, 34 (4), 1983: 459-482. Dyer, J. H., ‘Effective interfirm collaboration: how firms minimize transaction costs and maximize transaction value’, Strategic Management Journal, 18 (7), 1997: 535-556. Dyer, J. H., and Chu, W., ‘The determinants of trust in supplier-automaker relationships in the U.S., Japan and Korea’, Journal of International Business Studies, 31, 2 (Second Quarter 2000): 259-285. Fukuyama, F., Trust: the social virtues and the creation of prosperity (New York, 1995) Galassi, Francesco L., (1996), ‘Screening, Monitoring and Incentives in Co-operative Banks: the case of Italy’s Casse Rurali, 1883-1926’, University of Leicester discussion papers in Economic and Social History, No. ESH96/2. Gambetta, D. (ed.), Trust: making and breaking cooperative relations (Oxford, 1988) Glaeser, E., et al., (2000): ‘Measuring trust’, Quarterly Journal of Economics Granovetter, M., ‘Economic action and social structure: the problems of embeddedness’, American Journal of Sociology, 91 (3), 1985: 481-510. Hill, C. W. L., ‘National institutional structures, transaction cost economising and competitive advantage: the case of Japan’, Organizational Science, 6, 2, 1995: 119-131. Kitcher, P. ‘The evolution of human altruism’, Journal of Philosophy, 90, 1993, pp. 497-516. Lane, C. and Bachmann, R., ‘The social constitution of trust: supplier relations in Britain and Germany’, Organization Studies, 17/3, 1996: 365-395. Luhmann, N., Trust and power (Chichester, 1979). Maitland, I., ‘Virtuous markets: the market as school of the virtues’, Business Ethics Quarterly, 7 (1), 1997: 17-31. Mayer, C., ‘New issues in corporate finance’, European Economic Review, 32, 1988: 1167-88. Mayer, R. C., Davis, J. H. and Schoorman, F. D., ‘An integrative model of organizational trust’, Academy of Management Review, 20 (3), 1995: 709-734. Mitchell, B.R., and Deane, P. (1962): Abstract of British Historical Statistics (Cambridge: CUP). Mitchell, B. R., British Historical Statistics (Cambridge, 1988). Mitchell, B. R., Economic development of the British coal industry, 1800-1914 (Cambridge, 1984). Nishimura, S., The Decline of Inland Bills of Exchange in the London Money Market, 1855-1913 (Cambridge, 1971). Newton, L. ‘The Finance of Manufacturing Industry in the Sheffield Region, c.1850 to c.1885’ unpublished PhD. thesis (University of Leicester, 1994). Newton, L., ‘Regional bank-industry relations during the mid-nineteenth century: links between bankers and manufacturing in Sheffield c.1850 to c.1885’, Business History, 38, 1996, 64-83. Newton, L., ‘Domestic Institutional change: English and Welsh Joint-Stock Banking, 1826-1860’, in P. L. Cottrell, G. Feldman and J. Reis (eds.) Finance and the Making of the Modern Capitalist World (Aldershot, forthcoming). Newton, L. and Cottrell, P. L., ‘Banking in the English provinces, 1826-1857: to branch or not to branch?’ Business and Economic History (November 1998). Newton, L. (2000) ‘Trust and virtue in banking: the assessment of borrowers by bank managements at the turn of the twentieth century’, Financial History Review, 7.2, pp. 177-199. North, D.C. (1990): Institutions, Institutional Change and Economic Growth. (Cambridge: CUP). Parkhe, A., ‘Understanding trust in international alliances’, Journal of World Business, 33 (3), 1998a: 219-240. Parkhe, A., ‘Building trust in international alliances’, Journal of World Business, 33 (4), 1998b: 417-437. Powell, W. W. and DiMaggio, P. J. S (eds), New institutionalism in organisational analysis (London and Chicago, 1991) Powell, W. W., ‘Neither market nor hierarchy: network forms of organization’, in B. Staw and L. Cummings (eds), Research in organisational behaviour, Vol. 12, 1990: 295-336. Quality of Sheffield, published by the Sheffield Chamber of Commerce, (Sheffield, 1957) Rae, George (writing as Thomas Bullion), The Internal Management of a Country Bank (London, 1885). Ridley, M., The origins of virtue (1996). Sako, M., Process, quality and trust. Inter-firm relations in Britain and Japan (Cambridge, 1992) Smith, K. G., Carroll, S. J., and Ashford, S. J., ‘Intra- and interorganisational cooperation: towards a research agenda’, Academy of Management Journal, 38, 1, 1995: 7-23. Stiglitz, J. and Weiss, A. (1981). ‘Credit rationing in markets with imperfect information’. American Economic Review 71, 393-419. Thomas, S. E (1934), The rise and growth of joint stock banking, 1, Britain: to 1860, London. Uzzi, B. ‘Social structure and competition in interfirm networks: the paradox of embeddedness’ Administrative Science Quarterly, 42, 1997: 35-67. Williamson, O. E., ‘The economics of organisation: the transaction cost approach’, American Journal of Sociology, 87, 1981: 548-577. Zaheer, A. B., McEvily, B. and Perrone, V., Does trust matter? Exploring the effects of interorganisational and interpersonal trust on performance, Organization Science, 1998, Vol. 9, part 2, pp. 141-159. Zucker, L. G. (1986) ‘Production of trust: institutional sources of economic structure, 1840-1920’ in B. M. Staw and L. Cummings (eds) Research in organisational behaviour Vol. 8 (CT: JAI Press) pp. 53-111.
URI:	http://wrap.warwick.ac.uk/id/eprint/1583

Request changes to a record

Actions (login required)

View Item