Abstract: Classical transaction cost theory studies the optimal economic organization form and its impact on transaction costs under the given level of opportunism and asset specificity. This paper first introduces trust into the classic transaction cost economics analysis framework, and argues that higher level of trust means lower opportunistic behavior tendency, which can save transaction costs and reduce the level of integration, and improve firm performance by promoting vertical division of labor and specific asset investment. Then, using the listed manufacturing companies in Shanghai and Shenzhen Stock Exchanges of China from 2007 to 2021 as sample, the empirical study finds that in regions with higher trust, the transaction costs and vertical integration level of enterprises are lower, while the proportion of specific assets and the return on total assets are higher. The above conclusions are still valid after solving endogeneity problem and a series of robustness tests. The impact of social trust on enterprise vertical integration is more obvious in regions with poor legal environment, competitive industries, industries with high average asset specificity and non-state-owned firms. This paper reveals that social trust can not only reduce transaction costs and promote the vertical division of labor of enterprises, thus affecting the boundaries of enterprises, but also encourage firms to invest in more highly productive specific assets.

Key words: social trust, asset specificity, transaction costs, division of labor, vertical integration