Can social trust promote the professional division of labor in firms? Evidence from China

The informal institution of social trust has a crucial impact on economic activities. Based on social learning theory and social network theory, this study investigates the impact of social trust on the participation of firms in the professional division of labor. We find that firms in areas with a high level of social trust are more inclined to participate in the professional division of labor. Our results are robust to various measures of social trust and the professional division of labor, and are also robust after using the two-stage least-squares (2SLS) method to control for potential endogeneity. The mechanism analysis demonstrates that social trust can promote firms to participate in the professional division of labor by reducing search and contract costs. Further analyses show that social trust can improve total factor productivity (TFP) by promoting firms to participate in the professional division of labor, and that if the formal legal system cannot effectively protect the rights and interests of firms, social trust can play a substituting role.