International Trade and Social Connectedness

64 Pages Posted: 5 May 2020

See all articles by Michael Bailey

Michael Bailey

Facebook

Abhinav Gupta

New York University (NYU) - Department of Finance

Sebastian Hillenbrand

New York University (NYU) - Leonard N. Stern School of Business

Theresa Kuchler

New York University (NYU)

Robert Richmond

New York University (NYU) - Department of Finance

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: 2020

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 share social 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 providing a 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 Classification: F100, F500, F600

Suggested Citation

Bailey, Michael and Gupta, Abhinav and Hillenbrand, Sebastian and Kuchler, Theresa and Richmond, Robert and Stroebel, Johannes, International Trade and Social Connectedness (2020). CESifo Working Paper No. 8248, Available at SSRN: https://ssrn.com/abstract=3593163

Michael Bailey (Contact Author)

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Abhinav Gupta

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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Sebastian Hillenbrand

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Theresa Kuchler

New York University (NYU) ( email )

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Robert Richmond

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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