An essential decision of all firms is choosing good business partners such as suppliers or customers. In poor countries, frictions in information diffusion and contract enforcement make it difficult to switch to more efficient partners, distorting allocations, reducing growth, and amplifying idiosyncratic shocks in the local business network. As little is known about the magnitude of these effects, this project aims to fill the gap through collecting data and conducting a field experiment in the Jiangxi province of China to measure the impact of managerial networks on business outcomes.
The research team organizes monthly business meetings for small groups of randomly selected managers of newly established enterprises in order to foster business interactions. They use this design to explore three questions—first, they examine the impact of an exogenous change in a manager’s network by comparing performance of firms in the meetings to those in the control group. Second, they seek to identify mechanisms such as the role of trust and information by comparing new partnerships and diffusion of news of a credit product both within and outside the treated group. Lastly, they consider whether business interests or social familiarity motivate partnerships.
This experiment will provide valuable information on the understudied business friction of the cost of matching with trusted partners. The study will help fill a gap in the literature on how informational and contractual frictions shape cross-firm interactions. The research is also directly relevant to policy, as the project evaluates the concrete policy intervention of organizing business meetings and provides insight into the effects of this intervention on the efficiency of firm-to-firm matching.
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