Working Paper: CEPR ID: DP14624
Authors: Johannes Stroebel; Michael Bailey; Theresa Kuchler; Abhinav Gupta; Robert Richmond; Sebastian Hillenbrand
Abstract: We use anonymized data from Facebook to construct a new measure of the pairwise social connectedness between 180 countries and 332 European regions. We find that two countries trade more with each other when they are more socially connected and when they sharesocial connections with a similar set of other countries. The social connections that determine trade in each product are those between the regions where the product is produced in the exporting country and those where it is used in the importing country. Once we control for social connectedness, the estimated effect of geographic distance on trade declines substantially, and the effect of country borders disappears. Our findings suggest that social connectedness increases trade by reducing information asymmetries and by providinga substitute for both trust and formal mechanisms of contract enforcement. We also present evidence against omitted variables and reverse causality as alternative explanations for the observed relationships between social connectedness and trade flows.
Keywords: international trade; social connectedness; contract enforcement; information frictions
JEL Codes: F1; F5; F6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| social connectedness (Z13) | trade flows (F10) |
| geographic distance (R12) | trade flows (F10) |
| social connectedness (same social cluster) (Z13) | trade flows (F10) |
| social connectedness (non-exchange traded goods) (Z13) | trade flows (F10) |