Cultural Proximity and Bilateral Trade Costs

ABSTRACT We draw on recently derived measures of trade costs to test whether two measures of cultural proximity, bilateral trust and scores from the Eurovision Song Contest (ESC), are associated with trade costs. After controlling for distance, common border, geographical barriers, and other cultural proximity variables and using Ordinary Least Squares and Pseudo‐Poisson estimation, we find that higher trust and ESC scores are associated with lower bilateral trade costs. Interestingly, and consistent with the literature on informational barriers, the negative cost association between ESC scores and trade costs is substantially stronger for trade in manufacturing (differentiated) goods and negligible for agricultural (homogeneous) goods, and the magnitude of the effect increases when using Instrumental Variable (IV) estimation. Furthermore, we find that the association between ESC scores and bilateral trade costs remains statistically significant and robust across all our specifications, whereas the association between trust and trade costs is less robust under some specifications. Overall, our results suggest that ESC scores capture a trade‐cost channel rather than operating solely through preferences as suggested in earlier studies.