Valuing trust: an application to agricultural lending

Purpose Trust is a vital component of any relationship, especially when a business transaction is involved. Research has found that trust allows for flexibility in decision-making and reduces transaction costs. Trust increases credibility and decreases uncertainty, which is especially important in a borrower lender relationship. Small business managers who have a high level of trust from their loan officer obtain more credit at potentially lower interest rates. What is the role of trust in the ag-lending space and just how much does trust matter in this space? The goal of this project is to investigate if farmers are willing to pay for higher levels of different trust components (credibility, intimacy, reliability and self-orientation) in a financial relationship. Design/methodology/approach Using data from an online survey of Kansas farmers, a choice experiment is employed where participants are asked to rank the loan officer choices based on the four trust components and a stated interest rate. Findings We found that farmers are willing to pay for trust in their loan officer. In particular, they are willing to pay up to 2.4, 2.3, 1.4 and 3.5% more in their operating loan interest rate for higher credibility, reliability, intimacy and self-orientation. In addition, the willingness to pay increases as the level increases from a moderate (3) to a very high (5) level for credibility and intimacy. The willingness to pay for self-orientation, contrarily, decreases as the level increases above a moderate level (3). Research limitations/implications Given these results, loan officers should care about how trustworthy they are to their farmer customers and build trust with these customers. If not, those farmers may be enticed to find a new loan officer. Additionally, it would be beneficial for a lending institution to promote trust as part of their customer service approach and marketing efforts. Originality/value Trust arguably matters in a farmer/loan officer business relationship. But, just how much does trust matter? How much are farmers willing to pay for trust? Past research has not explicitly looked at the farmer–loan officer trust relationship. The goal of this paper is to investigate if farmers are willing to pay for trust in a business relationship. If so, what is the farmer’s willingness-to-pay for trust for a loan officer who manages their operating loan? How does trust vary across different farmer–loan officer relationships? Addressing these questions provides a strong contribution to the literature on trust in business relationships.