The influences of trust on choices of mode of trade credit

This paper investigates how trust, as an informal institution, affects corporate transaction cost and financial structure. Using trust index of different provinces in China, we find that differences of trust level in different regions of China caused differences of contract forms in different regions. The lower the regional trust level, the higher transaction costs of firms in the region, that is to say firms in regions with a lower trust level used more trade credit mode with higher transaction costs such as prepayments or notes payable and had more selling expenses and discounts. The conclusion of this paper supports that the local trust environment influences transaction behaviors and contract structure of firms and also indicates that inform institutions have the same vital economic significance to firms with formal institutions.