Perceived competence and credit access of SMEs: can trust change the rules of the game?

Banks play an essential role in financing firms and especially small and medium en-terprises (SMEs). The process used by banks to decide whether and how much to lend is complex and banks rely on different lending techniques. Relationship lending, by leveraging a variety of private information gathered through contact with the firm, its owner, and the local community, has a peculiar role and can benefit SMEs by providing them with easier access to credit. No previous research focuses specifically on the perceived competence of the entrepreneur or the owner/manager of the firm as well as on competence as a substitute of trust. The present paper tries to fill this gap. The research is based on a panel of 535 entrepreneurial SMEs which operate in the widely studied and economically successful North East of Italy. The data were collected by administering a survey to bank managers of local community banks and of two national banks. The regressions show that competence is positively related to overall credit gained and negatively related to interest rate. In addition, in low trusted SMEs, credit gained is positively related to competence while the interest rate is negatively linked to competence. In highly trusted firms, these relationships are not significant. Our findings support the point that competence is an important factor irrespective of the quality of the firm and that it is a substitute for trust in low-trusted SMEs. The findings have two major implications: banks should develop tools that are capable to catch the competence of the entrepreneurs irrespective of the performance of the firm depicted in the firms' data; the entrepreneurs need to effectively communicate their competences to the relevant stakeholders such as the bank managers. Thus, perceived competence can play an important role during economic downturns when the performance of the firm is affected by hostile eco-nomic environment

Trust me, I'm an entrepreneur! Can trust help SMEs to gain the credit they need?

Research on relationship lending focuses attention on economic factors which influence the relationships between SMEs' owners/managers and banks but no previous work has focused on the role of trust. Trust is expected to reduce transaction costs and agency costs, reduce the perceived credit risk and, thus, influence credit availability. Trustwor-thiness is associated with three attributes of SME owner managers' namely; ability, be-nevolence and integrity. It is hypothesised that lending managers' assessment of the trustworthiness of SME owner managers affects the ability of SMES to gain the credit. Trustworthiness is hypothesised as positively associated with credit access in contrast to lower trustworthiness which is associated with credit constraint. Use of overdraft is con-sidered here as indicator of credit constraint. The data were obtained from a survey of lending managers from banks in North East Italy. Control variables and a vector of trustworthiness factors were collected on a random sample of borrowers, resulting in a sample of 535 firms. Results from regression analysis found evidence that firms enjoy-ing high level of trust are able to access the credit they need and therefore are less credit constrained. Some implications of these results for banks, owner managers and future research are discussed

The Effect of Job Flexibility on Female Labor Market Outcomes: Estimates from a Search and Bargaining Model

This paper develops and estimates a search model of the labor market where jobs are characterized by wages and work-hours flexibility. Flexibility is valued by workers, and is costly to provide for employers. The model generates observed wage distributions directly related to the preference for flexibility parameters: the higher the preference for flexibility, the wider is the support of the wage distribution at flexible jobs and the larger is the discontinuity between the wage distribution at flexible and non-flexible jobs. Estimation results show that more than one third of women place positive value to flexibility, with women with a college degree valuing flexibility more than women with a high school degree. Counterfactual experiments show that flexibility has a substantial impact on the wage distribution but not on the unemployment rate. We comment on the implications of our approach for gender differentials in wages and schooling.search model, work-hours flexibility, structural estimation

Specific Human Capital, Trade, and the Wealth of Nations

We develop a general equilibrium model of trade with endogenous human capital acquisition in job specific skills and imperfectly observable skills. We show that even if there are no ex-ante fundamental differences between countries there may be equilibria under international trade with specialization in production and cross-country differences in standards of living. In particular, this may happen even if there is a unique equilibrium under autharchy; protectionism may in this case be a welfare enhancing policy for the poor country. In an asymmetric equilibrium, the country with a relatively skilled labor force will specialize in production of goods that are intensive in skilled labor. Incentives to invest in human capital depend on aggregate investments within the country and the relative factor prices. We show that incentives to invest in human capital are strictly decreasing in aggregate investments in the other country. Hence, our model has in common with many other approaches that externalities are central. Furthermore, as in most macro-oriented research on the topic, differences in standard of living are generated by differences in human capital accumulation. However, contrary to most previous work we provide explicit micro-foundations for the externalities: what distinguishes our model from most of the previous literature is that we assume that human capital investments are imperfectly observable. The external effects are derived from what we view as a rather natural informational problem and will as a consequence of barriers to labor mobility be local to the country where labor can move freely within.

Social responsibility reporting at group level in a mutual insurance company: the experience of ITAS Mutua Assicurazioni

The Global Reporting Initiative (GRI) guidelines state that a social responsibility re-port should provide information about 'all entities over which the reporting organisa-tion exercises control or significant influence'. A mutual insurance company which sells products through a network of insurance agents has to provide information about insurance agencies and about customers. ITAS is the first company to produce a so-cial responsibility report including data provided by the network of insurance agents, the customers and the shareholders. The paper illustrates the process used to collect and process information. Interestingly, the data collection process opened a channel of communication with both agents and customers/shareholders supplying ITAS with useful suggestions from the strategic and marketing point of view

Small and medium sized enterprises (SMEs) and their cost of capital

Existing finance literature is inadequate with respect to its coverage of the capital structure of small and medium sized enterprises (SMEs). This lack of coverage means that SMEs are provided with little or no guidance for optimising their cost of capital. This paper is an attempt to provide such guidance. For unlisted SMEs the cost of equity cannot be derived from the capital market, nor can it be ascertained by asking the entrepreneurs, since their decision to invest is usually driven by many other factors, over and above the simple (financial) return on investment requirement. A further problem in quantifying cost of equity results from the fact that entrepreneurs can be asked to provide additional (informal) investment in the form of personal guarantees. We put forward a model that attempts to solve these problems. Firstly, our model determines a 'legitimate' expected return for the entrepreneur, by considering the probability of liquidation of the venture and the loss incurred by the entrepreneur in this event. The former can be derived by looking at the specific survival rate of firms; the latter, is based on how much the potential bankruptcy affects the wealth of the entrepreneur. Secondly, we suggest taking into consideration the personal collateral provided by the entrepreneur, as if it were additional equity invested in the venture. To calculate such an amount, we suggest taking into account only the amount of collateralised debt that cannot be covered by the revenue from the sales of the firm's assets in case of liquidation

Informationally Efficient Trade Barriers

Why are trade barriers often used to protect home producers, even at the cost of introducing deadweight losses from higher commodity prices? We add an informational friction to the standard textbook argument in favor of free trade, and show that trade restrictions may be a more effcient policy than a lump sum transfer to the displaced producers. Trade barriers, while generating deadweight losses, have the benefit that they do not generate a need for compensation. When the policy maker does not know the amount that should be transferred, the risk of over- compensating may make trade barrier more efficient.Trade barriers, Distortionary policies

The Empirical Content of Models with Multiple Equilibria

We consider a generic environment with (potentially) multiple equilibria and analyze conditions for identification of the structural parameters. We then study conditions that allow for the estimation of both the structural parameters and the “selected equilibriumâ€. We focus on a “easy to compute†consistent 2-step estimator and use Monte Carlo methods on a model with social interactions to describe its finite sample propertiesmultiple equilibria, identification, structural estimation, montecarlo simulations

The Performance of the Pivotal-Voter Model in Small-Scale Elections: Evidence from Texas Liquor Referenda

How well does the pivotal-voter model explain voter participation in small-scale elections? This paper explores this question using data from Texas liquor referenda. It first structurally estimates the parameters of a pivotal-voter model using the Texas data. It then uses the estimates to evaluate both the within and out-of-sample performance of the model. The analysis shows that the model is capable of predicting turnout in the data fairly well, but tends, on average, to predict closer electoral outcomes than are observed in the data. This difficulty allows the pivotal-voter model to be outperformed by a simple alternative model based on the idea of expressive voting.