Trade, Trust and Transaction Costs

Tinbergen Institute Working Paper No. 2003-082/3

28 Pages Posted: 17 Nov 2003

See all articles by Frank A. G. den Butter

Frank A. G. den Butter

Vrije Universiteit Amsterdam - Economics

Robert H. J. Mosch

Vrije Universiteit Amsterdam; De Nederlandsche Bank

Date Written: October 7, 2003

Abstract

Transaction costs are a major reason why international trade flows are much smaller than traditional trade theory would suggest. Trust between trading partners lowers transaction costs and may therefore enhance trade. The empirical analysis of this paper shows that more trust leads to more trade so that part of the "mystery of missing trade" can be attributed to the lack of trust between trading partners, e.g. because of cultural differences and habits, or because of insufficient information on product quality and reliability. Our gravity equation estimates for 25 countries show that measures of both formal and of informal trust contribute to the explanation of bilateral trade flows. When we assume an increase in informal trust by one standard deviation, the combined effects of formal and informal trust may add up to a 90 to 150 percent change in bilateral trade, depending on the legal system. Moreover our estimation results suggest that the causal relation runs primarily from trust to trade, and that formal and informal trust are substitutes.

Keywords: trade, trust, transaction costs, gravity model, legal system

JEL Classification: F10, Z13, D23, K12

Suggested Citation

den Butter, Frank A. G. and Mosch, Robert H. J., Trade, Trust and Transaction Costs (October 7, 2003). Tinbergen Institute Working Paper No. 2003-082/3, Available at SSRN: https://ssrn.com/abstract=459501 or http://dx.doi.org/10.2139/ssrn.459501

Frank A. G. Den Butter (Contact Author)

Vrije Universiteit Amsterdam - Economics ( email )

Boelelaan 1105
NL 1081 HV Amsterdam
Netherlands
+31 20 444 6030 (Phone)

Robert H. J. Mosch

Vrije Universiteit Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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