Working Paper: CEPR ID: DP4837
Authors: Luigi Guiso; Paola Sapienza; Luigi Zingales
Abstract: How much do cultural biases affect economic exchange? We try to answer this question by using the relative trust European citizens have for citizens of other countries. First, we document that this trust is affected not only by objective characteristics of the country being trusted, but also by cultural aspects such as religion, a history of conflicts, and genetic similarities. We then find that lower relative levels of trust toward citizens of a country lead to less trade with that country, less portfolio investment, and less direct investment in that country, even after controlling for the objective characteristics of that country. This effect is stronger for good that are more trust intensive and doubles or triples when trust is instrumented with its cultural determinants. We conclude that perceptions rooted in culture are important (and generally omitted) determinants of economic exchange.
Keywords: Culture; FDI; Financial; Portfolio; Priors and Expectations; Trade and Exchange; Trust
JEL Codes: D02; D84; F10; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Cultural biases (J15) | Trust (G21) |
| Trust (G21) | Trade (F19) |
| Trust (G21) | Portfolio investments (G11) |
| Trust (G21) | Foreign direct investments (F21) |
| One standard deviation increase in trust (C29) | Exports (F10) |
| One standard deviation increase in trust (C29) | Average share of investment in a country (F21) |