Social Capital and Loan Cost: The Role of Interpersonal Trust

Abstract

We argue that social dilemmas structured as investment trust games are a dominant feature in social and economic life due to asymmetric information, incomplete contracts and non-overlapping competencies that are typical characteristics of business relationships. We therefore consider that borrowers living in geographical areas with higher interpersonal trust are more likely to overcome the coordination failures typical of this kind of social dilemmas, thereby creating higher economic value and reducing the risk of their economic activity. Our empirical findings support this hypothesis, showing that lenders charge significantly lower loan costs on borrowers living in areas characterized by higher interpersonal trust.