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Does Bilateral Trust Affect International Movement of Goods and Labor?

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  • Spring, Eva

    (University of Fribourg)

  • Grossmann, Volker

    (University of Fribourg)

Abstract

Trust in the citizens of a potential partner country may affect the decision to trade with or to migrate to a foreign country. This paper employs panel data to examine the causal impact of such bilateral trust on international trade and migration patterns. We apply instrumental variables (IV) approaches that capture the exogenous variance of bilateral trust separately with eight indicators of genetic ("somatic") distance between country-pairs. These indicators work equally well at the first stage. However, second-stage results very much depend on the exact measure employed as instrument. Overall, we find little evidence that bilateral trust affects international movements of goods and labor. More generally, we highlight the potential fragility of IV estimations even when the instruments seem plausible on theoretical grounds and when standard statistical tests confirm their validity.

Suggested Citation

  • Spring, Eva & Grossmann, Volker, 2013. "Does Bilateral Trust Affect International Movement of Goods and Labor?," IZA Discussion Papers 7385, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp7385
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    2. Owen, Ann L. & Temesvary, Judit, 2014. "What determines cross-border bank lending and risk-taking? The effects of culture, geography, institutions, and information exchange," MPRA Paper 57692, University Library of Munich, Germany.
    3. Stracca, Livio & Buetzer, Sascha & Jordan, Christina, 2013. "Macroeconomic imbalances: a question of trust?," Working Paper Series 1584, European Central Bank.
    4. Renner, Laura & Krieger, Tim & Ruhose, Jens, 2014. "Culture, Selection, and International Migration," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100434, Verein für Socialpolitik / German Economic Association.
    5. Liu, Yuna, 2016. "Trust and stock market correlation: a cross-country analysis," Umeå Economic Studies 924, Umeå University, Department of Economics.

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    More about this item

    Keywords

    somatic distance; instrumental variables; international migration; international trade; bilateral trust;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • Z10 - Other Special Topics - - Cultural Economics - - - General

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