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Home Bias in Trade within China: The Role of Trust

Author

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  • Zilong Li

Abstract

The home bias is a well-documented phenomenon highlighting how administrative borders hinder economic transactions. This paper estimates the magnitude of China’s provincial border effect using inter-provincial and intra-provincial trade data, with a particular focus on the role of trust in shaping these effects. To address potential endogeneity, I employ a novel instrumental variable leveraging provincial exaggerations highlighted by media during the Great Leap Forward. The analysis uncovers a significant provincial home bias, with provincial borders substantially reducing inter-provincial exports. Importantly, both the exporter-to-importer trust and the importer-to-exporter trust emerge as crucial mechanisms driving this effect.

Suggested Citation

  • Zilong Li, 2025. "Home Bias in Trade within China: The Role of Trust," Working Papers 202505, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:202505
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    File URL: http://hdl.handle.net/10197/31861
    File Function: First version, 2025
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    Keywords

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    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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