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Trade, Trust and Transaction Cost

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  • Frank A.G. den Butter

    ()
    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

  • Robert H.J. Mosch

    ()
    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

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 p!rimarily from trust to trade, and that formal and informal trust are substitutes.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-082/3.

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Date of creation: 13 Oct 2003
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Handle: RePEc:dgr:uvatin:20030082

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Web page: http://www.tinbergen.nl

Related research

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

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References

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Citations

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Cited by:
  1. Afandi, Elvin & Kermani, Majid, 2012. "The Relationship between Trust and a Firm’s Access to Financing: Evidence from Transitional Countries," MPRA Paper 46998, University Library of Munich, Germany.
  2. Nathan Nunn & Leonard Wantchekon, 2011. "The Slave Trade and the Origins of Mistrust in Africa," American Economic Review, American Economic Association, vol. 101(7), pages 3221-52, December.
  3. Frank A.G. den Butter & Stefan P.T. Groot & Faroek Lazrak, 2007. "The Transaction Costs Perspective on Standards as a Source of Trade and Productivity Growth," Tinbergen Institute Discussion Papers 07-090/3, Tinbergen Institute.
  4. Helmut Wagner, 2012. "Is harmonization of legal rules an appropriate target? Lessons from the global financial crisis," European Journal of Law and Economics, Springer, vol. 33(3), pages 541-564, June.
  5. Kodila-Tedika, Oasis & Agbor Agbor, Julius, 2012. "Does Trust Matter For Entrepreuneurship : Evidence From A Cross-Section Of Countries," MPRA Paper 42292, University Library of Munich, Germany.
  6. Baeten, Joost & Butter, Frank A.G. den, 2006. "Welfare gains by reducing transaction costs: Linking trade and innovation policy," Serie Research Memoranda 0012, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  7. Susanto, Dwi & Rosson, C. Parr, III, 2010. "Cultural Barriers and Agricultural Trade in the Western Hemisphere," 2010 Annual Meeting, February 6-9, 2010, Orlando, Florida 56352, Southern Agricultural Economics Association.
  8. Frank A.G. den Butter & Christiaan Pattipeilohy, 2007. "Productivity Gains from Offshoring: an Empirical Analysis for the Netherlands," Tinbergen Institute Discussion Papers 07-089/3, Tinbergen Institute.
  9. Friedrich Heinemann & Benjamin Tanz, 2008. "The impact of trust on reforms," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 11(3), pages 173-185.
  10. Henningsen, Geraldine & Henningsen, Arne & Henning, Christian H.C.A., 2011. "Measuring the Influence of Information Networks on Transaction Costs Using a Non-parametric Regression Technique," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114547, European Association of Agricultural Economists.
  11. Anna Klabunde, 2013. "How Much Should an Investor Trust the Startup Entrepreneur? - A Network Model," Ruhr Economic Papers 0450, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  12. Canavari, Maurizio & Cantore, Nicola, 2007. "The challenge of the international organic certification: a new opportunity for agricultural trading?," 105th Seminar, March 8-10, 2007, Bologna, Italy 7902, European Association of Agricultural Economists.
  13. Frank A.G. den Butter & Raphie Hayat, 0000. "Trade between China and the Netherlands: a Case Study of Globalization," Tinbergen Institute Discussion Papers 08-016/3, Tinbergen Institute.
  14. Yakop, M. & van Bergeijk, P.A.G., 2009. "The weight of economic and commercial diplomacy," ISS Working Papers - General Series 18715, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.

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