CULTURAL BIASES IN ECONOMIC EXCHANGE

[attachment=17272]
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



First, there seems to be some common views, which in a rational expectations world coincide
with the objective characteristics of the country being trusted. Everybody ranks German
managers relatively high, while Italian ones relatively low. Second, there seems to be a “homecountry
effect” in expectations: manager trusts fellow-countrymen relatively more than what
managers from other countries rank them. Italian managers, for instance, rank themselves
fourth in trustworthiness, while they are ranked fifth (last) by every other group. Third, there
are match-specific attitudes. French managers, for instance, rate British managers much lower
than any other ones except the Italians.
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.



To capture the implicit positive or negative bias against other nations present in a country’s
cultural tradition, we also use its history of wars. People’s priors can be affected by their
education and in particular by the history they study in school. Italian education, for instance,
emphasizes the struggles that lead to the reunification of the country in the 19th century.
Since the major battles during this period have been fought against Austria, Italian students
may develop, as our data show, a negative image of Austrians. These findings are consistent
with Bornhorst et al (2004), who find that cultural stereotypes affect the level of trust in an
experimental setting.