Trust, Efficiency and Organizations: Evidence from Rwanda

Abstract: When contract enforcement is limited and markets are missing, trust becomes essential to economic exchange within large, complex, organizations. This paper explores the relationships between trust, organization and efficiency by focusing on coffee mills in Rwanda. We take advantage of three features of the context: [1] large number of large firms within an homogenous sector in a LDC; [2] simple technology allows for precise measurement of good management practices and unit costs differences and [3] a country in which, due to both long and recent history, significant variation in trust across narrowly defined communities is expected. We conduct a comprehensive firm survey of all mills, interviewing managers, owners, collectors, workers and farmers and match the data with a number of geo-spatial datasets. We obtain precise measures of trust by using canonical questions and play trust games among the respondents. We obtain information on specific managerial practices relevant to the industry and focus on the establishment of interlinked transactions between wet mills and farmers. Within narrowly defined locations we document significant dispersion in unit costs across mills. The dispersion is generated by variation in unit costs other than conversion ratios and coffee cherries input prices, i.e. from components of unit costs that are directly affected by management practices. We find that relationship-specific measures of trust positively correlate with both efficiency and managerial practices as predicted by theory. The importance of trust in an environment with missing markets overturns standard presumptions on the relationship between competition and efficiency. We show preliminary evidence that competition is associated with lower trust and higher unit costs. The evidence suggests that building trust is essential in successfully managing agricultural value chains and that the market is characterized by pecuniary externalities not mediated by prices.