Trust, Business Group Decentralization, and Firm Productivity

We first confirm that greater business group verticality is associated with higher firm productivity. We then develop a theoretical model explaining how bilateral trust influences group verticality.

To test these predictions, we construct a novel dataset by developing an algorithm that extends Amadeus ownership links into ownership chains, allowing us to measure verticality for a large European sample. We find that groups with higher average trust among members are more vertically structured. Firm-level estimates indicate that more trustworthy affiliates are positioned in a layer closer to the ultimate owner and exhibit higher productivity.