April 2015

IZA DP No. 8974: Culture of Trust and Division of Labor

Firms exhibit heterogeneity in size, productivity, and internal structure, and this is true even within the same industry. It has been thought since the time of Adam Smith that a firm's internal structure affects its productivity through the channel of gains from specialization. Our paper provides evidence of a link between an organization's culture – specifically the trust environment – and its internal structure. We show experimentally that exogenously imposed culture endogenously leads to variation in organizational form. We prime trust using past performance from a pilot study and demonstrate that the level of trust within an organization affects division of labor and consequently organizational productivity. This evidence is consistent with a cross-country link between trust and the division of labor that we observe in data from the European Social Survey. Our results point to a mechanism that can help explain existing results on the connection between generalized trust and growth. It also points to an important determinant of a firm's internal structure: corporate culture (of trust).