Abstract
How much do cultural biases affect economic exchange? We answer this question by using data on bilateral trust between European countries. We document that this trust is affected not only by the characteristics of the country being trusted, but also by cultural aspects of the match between trusting country and trusted country, such as their history of conflicts and their religious, genetic, and somatic similarities. We then find that lower bilateral trust leads to less trade between two countries, less portfolio investment, and less direct investment, even after controlling for the characteristics of the two countries. This effect is stronger for goods that are more trust intensive. Our results suggest that perceptions rooted in culture are important (and generally omitted) determinants of economic exchange.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1095-1131 |
| Number of pages | 37 |
| Journal | Quarterly Journal of Economics |
| Volume | 124 |
| Issue number | 3 |
| DOIs | |
| State | Published - Aug 2009 |
Funding
∗We thank Giuseppe Nicoletti for providing the Organisation for Economic Co-operation and Development data set, Michele Gambera for providing the Morningstar portfolio data, and Roc Armenter for his excellent job as a research assistant. We also thank Franklin Allen, Marianne Baxter, Patricia Ledesma, Mitchell Petersen, Andrei Shleifer, René Stulz, and Samuel Thompson for their very helpful comments. We thank Jim Fearon and Romain Wacziarg for their help with the measure of linguistic common roots. We benefited from the comments of participants to seminars at the European University Institute, Wharton, Northwestern University, University of Chicago, University of Wisconsin, NBER Corporate Finance, International Trade, and Behavioral Meetings and Peggy Eppink for editorial help. Luigi Guiso acknowledges financial support from MURST and the EEC. Paola Sapienza acknowledges financial support from the Center for International Economics and Development at Northwestern University. Luigi Zingales acknowledges financial support from the Center for Research on Security Prices and the Stigler Center at the University of Chicago.
ASJC Scopus subject areas
- Economics and Econometrics