Discussion Paper Details

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Title: Cultural Biases in Economic Exchange

Author(s): Luigi Guiso, Paola Sapienza and Luigi Zingales

Publication Date: January 2005

Keyword(s): culture, FDI, financial portfolio, priors and expectations, trade and exchange and trust

Programme Area(s): Financial Economics and International Trade and Regional Economics

Abstract: How much do cultural biases affect economic exchange? We try to answer this question by using the relative trust European citizens have for citizens of other countries. First, we document that this trust is affected not only by objective characteristics of the country being trusted, but also by cultural aspects such as religion, a history of conflicts, and genetic similarities. We then find that lower relative levels of trust toward citizens of a country lead to less trade with that country, less portfolio investment, and less direct investment in that country, even after controlling for the objective characteristics of that country. This effect is stronger for good that are more trust intensive and doubles or triples when trust is instrumented with its cultural determinants. We conclude that perceptions rooted in culture are important (and generally omitted) determinants of economic exchange.

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Bibliographic Reference

Guiso, L, Sapienza, P and Zingales, L. 2005. 'Cultural Biases in Economic Exchange'. London, Centre for Economic Policy Research.