Narratives, Trust, and Market Exchange in Developing Countries

Abstract

Entrepreneurs face a range of obstacles in developing countries, including a low-skilled workforce and weak institutions. Moreover, for historical reasons, business legitimacy is low. In these contexts, new entrepreneurs seek to survive in hostile environments but often lack reputations. In this project, we explore the role of narratives as a dimension of business strategy in developing countries. Specifically, we ask whether narratives facilitate exchange in settings with weak institutions. Our central hypothesis is that narratives create trust. Moreover, we posit that entrepreneurs are more likely to use narratives in environments with low levels of generalized trust. We test these hypotheses using a sample of about 25,000 online stores active as of October 2021 in Argentina (13,000) and Brazil (12,000), operating on one of the largest e-commerce providers for firms in Latin America. We show that stores displaying a narrative on their website boost their sales by 20 percentage points in a three-month period. Consistent with our expectations, narratives are more prevalent in low-trust regions (suggesting substitution) but, somewhat intriguingly, more prevalent in regions with high trust in business (suggesting complementarity). The effect is concentrated on younger firms that presumably have not developed reputations.