How Entrepreneurs Build Trust in Their Business

The establishment of trust is a key component of economic activity and social ties can make business dealings work better. However, we do not know much about how economic actors create new social ties deliberately in order to pursue their objectives. In this field, historical research has much to offer. On the ground of historical data from the late Middle Ages to the twentieth century, Guido Alfani (Department of Policy Analysis and Public Management, Dondena and IGIER) and Vincent Gourdon (CNRS and Centre Roland Mousnier) in Entrepreneurs, Formalization of Social Ties and Trustbuilding in Europe (14th-20th Centuries) (forthcoming in The Economic History Review) explore the way in which European merchants and entrepreneurs used specific rituals to establish formal social ties, with the intent of protecting their business relationships. They find impressive factors of continuity in the long run, as well as interesting and partly unexpected differences across the European continent (particularly after the Protestant Reformation).

The article focuses on relational instruments that until now had been neglected, particularly godparenthood and marriage witnessing. These instruments (which can be studied as "social institutions") produced, and still produce, weaker ties compared to kinship or marriage alliance, but relative weakness is not synonymous with ineffectiveness. Relative weakness, indeed, means also flexibility and opening of possibilities.

The research shows that formalization and ritualization of social relationships were used by entrepreneurs to establish trust with their business associates, for example when information was asymmetric or when institutions were perceived as inefficient in guaranteeing mutual good behaviour. By "formalization" of social ties the authors mean the way in which a rite, such as baptism or marriage, could be used to provide a social relationship with a 'form' or shape, subjecting it to specific rules of conduct. Key to this was the markedly public character of many rites. The fact that a new formal tie was publicly established meant, first, that it could be opposed to others (for example, when it was the sign of a vertical relationship of patronage it made clear to everybody that one of the parties was under the protection of the other). Secondly, that a mutual responsibility was assumed, and that the misbehaviour of one of the parties could lead to social sanctions and consequently to economic damage.

The social sanction against who misbehaved could lead the parties to have greater confidence in one another. As social and economic theory suggest, if the parties do not know each other and cannot rely on institutions, they may choose not to cooperate or may have to pay large transaction costs to get guarantees. In Europe during the Medieval and the Early Modern period, and even later, a tie of godparenthood could greatly ease economic transactions. For example, a borrower could be introduced to a lender by a common godfather or, more importantly, could invite the lender to be godfather to his child, subjecting their transactions to a social and divine scrutiny and thus inducing the lender to trust him.

During the very long period of time that we considered, social institutions were subject to many significant changes. In particular, the Reformation questioned the way in which rituals operated, but allowed social institutions such as godparenthood to continue to work in ways very similar to the Medieval ones. An interesting result of the research, is that Catholic "counter-reformed" godparenthood was actually much more reformed than Protestant godparenthood - but in this case, the "modern" version of this social institution proved to be less favorable to economic transaction than the medieval one. Interestingly, this is the opposite of what is usually implied by standard "weberian" interpretations.