Cultural and Institutional Determinants of Bilateral Trade Flows
Tinbergen Institute Discussion Paper No. 05-074/3
31 Pages Posted: 17 Aug 2005
Date Written: July 2005
This paper studies the intangible costs of international trade by extending the basic gravity equation with measures of cultural and institutional distance, and institutional quality. Analyzing a sample of bilateral trade flows between 92 countries in 1999, we find that institutional distance has a negative effect on bilateral trade, presumably because the transaction costs of trade between partners from dissimilar institutional settings are high. In contrast, we find that cultural distance has a positive effect on bilateral trade. A potential explanation for this finding is that firms prefer trade to host-country production in culturally distant countries. Finally, we find that the institutional quality of both the importer and exporter increases the amount of bilateral trade.
Keywords: Trade, gravity model, cultural distance, institutions
JEL Classification: F14
Suggested Citation: Suggested Citation