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Trust or distrust: entrepreneurs vs. self-employed

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Abstract

Trust and entrepreneurship are important determinants of economic development. The two, however, have been discussed separately and crudely defined. This paper distinguishes between trust and distrust and constructs a theoretical framework to understand their relations with (innovative) entrepreneurship and (routine) self-employment. The framework shows that entrepreneurs, who make an unverifiable investment, can rely on low distrust and high trust to overcome the hold-up risk. In contrast, the self-employed, who make a verifiable investment, can rely on high distrust and high trust to monitor and verify the terms of the contract. This paper also empirically analyzes the World Values Survey by relating distrust and trust to the choice of employment type (among entrepreneurship, self-employment, paid employment, or unemployment) in multinomial logit models. The results are largely consistent with the predictions of the theoretical framework.

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Notes

  1. Zwilling (2013), for example, states “trust is the most powerful tool that an entrepreneur can wield.”

  2. The “broadly defined” self-employed includes both innovative entrepreneurs and routine self-employed. Unless mentioned otherwise, we will use the narrow definition of the self-employed.

  3. These studies show, for example, that trust promotes entrepreneurship by creating room for new opportunities (Audretsch et al. 2011), facilitating the creation of enterprises (Davidsson and Honig 2003), promoting access to other resources (Packalen 2007), or attracting business angel investors (Maxwell and Lévesque 2014).

  4. Many studies have also shown that high positive affectivity or valents are not synonymous with low negative ones (e.g., Watson and Tellegen 1985; Stallings et al. 1997; Cacioppo and Gardner 1993).

  5. Das and Teng (1998: p. 491) define confidence as “a firm’s perceived level of certainty that its partner firm will pursue mutually compatible interests in the alliance, rather than act opportunistically.”

  6. Expected utility not only reflects the financial payoffs but also the emotional or non-pecuniary payoffs. It is debatable whether a career choice is a rational decision that maximizes expected utility (Krieshok et al. 2009). Alternatively, one can view our empirical specification as a descriptive one, which attempts to back out a possible rational preference that can explain one’s career choice.

  7. Most empirical studies to measure distrust have used their own survey questions that specifically mention distrust. For example, Benamati et al. (2010) uses a survey question “I usually distrust people until they give me a reason to trust them.”

  8. One can argue that this question measures “perceived fairness”, not distrust. However, fairness can lead to a relationship of trust (Busenitz et al. 2004). Moreover, fairness and trust are empirically so highly correlated that sometimes respondents discuss them concurrently (Smith and Lindsay 2014). Thus, we do not distinguish between fairness and trust in our empirical analyses. Such a distinction would be important, however, if we focused on the dynamic aspects of trust and entrepreneurship.

  9. 7.18% of respondents gave no response or replied “do not know”; we code these responses as missing.

  10. Even when we recode the distrust measure from a ten-point scale to a two-point scale (using the median as a cutoff), the correlation between distrust and trust is still −0.20.

  11. We exclude the retired. Excluding students, housewives, or part-time employees does not change the main results.

  12. These results are not shown due to space constraint, but are available from the authors.

  13. Available from https://www.gemconsortium.org/data

  14. TEA measures percentage of 18–64 population who are either a nascent entrepreneur or owner-manager of a new business”.

  15. “Established business ownership” measures percentage of 18–64 population who are currently an owner-manager of an established business, i.e., owning and managing a running business that has paid salaries, wages, or any other payments to the owners for more than 42 months.

  16. The mean from GEM data is somewhat higher, possibly because TEA in GEM includes the nascent entrepreneurs who are likely to be classified as the unemployed in WVS.

  17. Unfortunately, GEM data does not distinguish between “innovative” established business ownership and “routine” established business ownership, while WVS does not distinguish between TEA and established business ownership. Thus, we cannot directly validate our measures for innovative entrepreneurs and routine self-employed. Their ratio, however, is still correlated with “opportunity-to-necessity TEA ratio” in GEM at 0.58 correlation coefficient, and with “innovation-driven TEA ratio” in GEM at 0.40, which provide some validation.

  18. Education ranged from one (= “Inadequately completed elementary education”) to eight (= “University with degree/higher education”).

  19. Whenever necessary, we have recoded the values so that higher values mean a higher rating (e.g., higher health, income, etc.).

  20. The unemployed include students, housewives, and other labor market non-participants, which can explain their high values for cognitive, creative tasks. Recall that excluding students and housewives does not change our main results.

  21. Due to space constraints, the coefficients of these additional variables are not shown, but available from the authors.

  22. Even when we use routine paid-employment as a baseline, the qualitative results do not change.

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Authors and Affiliations

  1. Graduate School of Public Administration, Seoul National University, Seoul, South Korea

    Illoong Kwon

  2. Department of Children and Family Services, County of Los Angeles, Los Angeles, CA, USA

    Kitae Sohn

  3. Department of Economics, Konkuk University, Seoul, South Korea

    Kitae Sohn

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  1. Illoong Kwon
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  2. Kitae Sohn
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Correspondence to Illoong Kwon.

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Table 9 Definitions of variables
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Kwon, I., Sohn, K. Trust or distrust: entrepreneurs vs. self-employed. Small Bus Econ 56, 1553–1570 (2021). https://doi.org/10.1007/s11187-019-00278-y

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