Do firms choose inputs that minimize their cost of production, ignoring the attitudes of their owners and employees? We examine this question using an episode of worsening relations between the USand France: from February 2002 to March 2003, France's favorability rating in US public opinionpolls fell from 83 percent to 35 percent. Very negative attitudes towards France became common evenamong college educated Americans with high levels of income, so they were likely prevalent amongmanagers. Using data from 1999-2005, we find that the worsening relations reduced US imports fromFrance by about 15 percent and US exports to France by about 8 percent, compared to other Eurozoneor OECD countries. This decline was due in large part to a fall in France's share of the quantity ofinputs traded between the Eurozone and the US; this decline is significant even after we control for changes in the product composition of trade flows. We also find that the decline in trade w as accompanied by a similar drop in both business trips and tourist visitations of US residents to Francecompared to Western Europe. Taken together, our findings suggest that competition cannot eliminatethe effect of attitudes on firms' choice of inputs.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0815.
Find related papers by JEL classification: J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities and Races; Non-labor Discrimination F14 - International Economics - - Trade - - - Country and Industry Studies of Trade
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