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Informal relationships, in particular trust, allow managers to arrange a business in a more productive way; high-trust firms are both more profitable and faster growing. For example, if they are trusted, managers can delegate decisions to employees with confidence that employees will believe the promised rewards. This is important because employees are often better informed than their bosses. Consequently, firms that rely solely on formal contracts will miss profitable opportunities. Key findings Pros Formal employment contracts are incomplete, necessitating informal agreements to fill the gaps; these informal agreements rely on two-way trust between managers and employees. Trust comes from individual relationships between an employee and their managers, managerial reputation, and social norms. Trust allows for more effective task allocation and organizational structures, which can allow firms to better utilize employees’ knowledge and skills, aiding profitability. Competition in the product market can engender higher levels of trust within organizations, as competition spurs firms to be more productive. Cons Market downturns can cause trust to be broken, as managers find it harder to keep past promises in tough times. External negative shocks mean that trust tends to be lost over time, rather than earned. Labor mobility makes trust more difficult; shorter employment relationships reduce the reputational costs to managers from breaking their word. Trust is difficult to manage in organizations because it is the combination of social norms, managerial practices, and individual relationships. Author's main message Delegating authority can make firms more productive and profitable, as employees are often better informed than managers. Managers must be able to trust that employees will not misuse their autonomy, and employees need to trust that managers will keep their promises. If they are trusted, managers can delegate decision-making to employees with confidence that a promised future reward will be sufficient to appropriately motivate them. Consequently, trust is an important input into running a firm well. One policy option to facilitate better-run firms is to promote management training programs, much like a modernized version of the state-sponsored training programs offered in the US in the post WWII period. Download full article (PDF) This article first appeared on IZA World of Labor in April 2023. Reproduced with permission Tweet July 6, 2023 Print Article(s) by this author Trust in management in organizationsEmployee trust in their managers allows a firm to delegate decision-making, aiding both productivity and profitability July 6, 2023［From IZA］ Articles Column Special Series Newspapers & Magazines Fellows' Works VoxEU Column From IZA Perspectives from Around the World Other Contents RIETI Report Policy Update Keizai Sangyo Journal Communications Newsletter RSS Feed Facebook X YouTube Research Areas Research Programs (FY2024-2028) Research Programs (FY2020-2023) Research Programs (FY2016-2019) Research Programs (FY2011-2015) Policy Research Domains (FY2006-2010) Projects Survey Fellows Research/Policy Papers Discussion Papers (English) Discussion Papers (Japanese) Policy Discussion Papers (English) Policy Discussion Papers (Japanese) Technical Papers (English) Technical Papers (Japanese) Non Technical Summaries List of Articles in Journals Research Digest Discussion Papers Search Publications RIETI Books (English) RIETI Books (Japanese) History of Japan's Trade and Industry Policy Authors' Words Other Publications (English) Other Publications (Japanese) Events Symposiums Workshops BBL Seminars Archived Seminar Series Data JIP Database R-JIP Database CIP Database Industry-Specific Nominal and Real Effective Exchange Rates AMU and AMU Deviation Indicators JSTAR RIETI-TID RIETI FDI Database ICPA Project Links Articles Column Special Series Newspapers & Magazines Fellows' Works VoxEU Column From IZA Perspectives from Around the World Other Contents RIETI Report Policy Update Keizai Sangyo Journal (METI Journal) About RIETI Privacy Policy Site Policy Site Map Help Contact METI Web Site Research Institute of Economy, Trade and Industry, IAA (JCN 6010005005426)JCN: Japan Corporate Number Opinions expressed or implied on this website are solely those of the author, and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI).Titles, numbers, specific names, etc. on this website are as of the date of publication. 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