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Trade, Trust and Transaction Cost

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Author Info
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)

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

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Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Heinemann, Friedrich & Tanz, Benjamin, 2008. "The Impact of Trust on Reforms," ZEW Discussion Papers 08-053, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!]
  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. [Downloadable!]
  4. 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. [Downloadable!]
  5. Frank A.G. den Butter & Raphie Hayat, . "Trade between China and the Netherlands: a Case Study of Globalization," Tinbergen Institute Discussion Papers 08-016/3, Tinbergen Institute. [Downloadable!]
  6. 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. [Downloadable!]
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