Trusting without a Safety Net: The Peril of Trust in Base of the Pyramid Economies

In high-transaction-cost environments, such as the world's poorest base-of-the-pyramid economies (BOP), trust helps entrepreneurs form partnerships while conserving resources related to monitoring, contracting, and other transaction costs. However, trust can also expose entrepreneurs to their partners' opportunism. In developed economies, effective and consistent legal systems can protect against such opportunism. But what happens when formal institutions are ineffective and inconsistent, as is common in BOP economies, and how does trust influence entrepreneurs' performance subsequent to forming partnerships? We answer these questions, drawing on a sample of 338 entrepreneurs in the Kingdom of Eswatini (formerly known as Swaziland). We find that entrepreneurs' trust has a negative effect on business operating performance, indicating that, given the legal systems in the BOP context, trusting entrepreneurs bear more fully the brunt of opportunism. However, this negative effect can be mitigated when entrepreneurs register their businesses with the government and pay taxes. We also find that, for entrepreneurs who earn income from other businesses, the negative effect of trust on performance is stronger. We found no moderating effect related to entrepreneurs' education.