scispace - formally typeset
Search or ask a question
Journal Article•DOI•

Cultural Biases in Economic Exchange

Luigi Guiso1, Paola Sapienza2, Luigi Zingales3•
European University Institute1, Northwestern University2, University of Chicago3
01 Aug 2009-Quarterly Journal of Economics (Oxford University Press)-Vol. 124, Iss: 3, pp 1095-1131
TL;DR: This paper used data on bilateral trust between European countries and found that lower bilateral trust leads to less trade between two countries, less portfolio investment, and less direct investment, even after controlling for the characteristics of the two countries.
Abstract: How much do cultural biases affect economic exchange? We answer this question by using data on bilateral trust between European countries. We document that this trust is affected not only by the characteristics of the country being trusted, but also by cultural aspects of the match between trusting country and trusted country, such as their history of conflicts and their religious, genetic, and somatic similarities. We then find that lower bilateral trust leads to less trade between two countries, less portfolio investment, and less direct investment, even after controlling for the characteristics of the two countries. This effect is stronger for goods that are more trust intensive. Our results suggest that perceptions rooted in culture are important (and generally omitted) determinants of economic exchange.

Summary (3 min read)

Jump to: [Introduction] – [II. THE MODEL] – [III. THE SOLUTION] – [A. Hierarchy of connected correlations] – [B. No magnetization offset, µ̄ = 0] – [1. First two orders] – [C. Nonzero offset, µ̄ 6= 0] – [IV. THE NESS IS NON-GAUSSIAN] – [A. Matrix product operator ansatz] – [V. NONEQUILIBRIUM PHASE TRANSITION] and [VI. SUMMARY]

Introduction

  • It is suggested that the scaling of the relaxation time with the system size can serve as a signature of a nonequilibrium phase transition.
  • Another interesting aspect is that in a certain thermodynamic or weak driving limit the solution can be written as a matrix product operator (MPO) with matri ces of small fixed dimension 4.
  • It is shown that the model exhibits a nonequilibrium phase transition at zero dephasing, going from the NESS that is Gaussian and displays a ballistic transport, to the NESS that is nonGaussian, shows diffusive spin transport, and exhibits long-range correlations for nonzero dephasing.

II. THE MODEL

  • The Lindblad dissipator is therefore a sum of two terms, Ldis = Lbath + Ldeph. (4) The dephasing part Ldeph = ∑n j=1 L deph j is a sum of Ldephj , each of which acts only on the j-th site and is described by a single Lindblad operator, Ldephj = √ γ 2 σzj .
  • To see that this is indeed the case one can look for a stationary state of the bath LbathL dissipator only.
  • Of course, the nonequilibrium stationary state of the whole master equation (2), which in addition includes a unitary part and a dephasing, will have a slightly different magnetization at the ends.

III. THE SOLUTION

  • This simple structure is a consequence of the fact, that all other operators, that could result in jk or σ z j when operated on by L, are zero.
  • The matrix of the superoperator L (B) j has only two nonzero elements.

A. Hierarchy of connected correlations

  • Let us briefly argue why the NESS can be calculated term by term in the expansion over µ, Eq. (11), and why the set of equations for each term is closed.
  • Similar expressions hold for the bath at the right end.
  • The only superoperator that does not conserve the number of operators is that of the bath, which can create σz out of an identity.
  • If the authors look at the coefficient in front of an operator that is a product of r non-identity operators, then this coefficient is a linear function of coefficients in the set S(r) and coefficients in the set S(r−1) (these come from the action of the bath Lbath).
  • The largest non-connected term in µrR(r) on the other hand scales as ∼ brnr and comes from the product of r operators σzj , see also the explicitly ansatz below.

B. No magnetization offset, µ̄ = 0

  • Let us first find the NESS for a bath with a zero offset of magnetization, µ̄ = 0.
  • It is instructive to first find the equilibrium stationary state in the absence of driving, when µ = 0.
  • Inducing no net magnetization.
  • This equilibrium state can therefore be thought of as an infinite temperature state.

1. First two orders

  • Higher order terms in µ are more complicated in this case (although of the same form) and the authors do not discuss inhomogeneous dephasing in the present work.
  • The dependence of the maximal current on γ is trivial, the smaller the dephasing the larger is the current.
  • If nγ is on the other hand smaller than ΓL,ΓR, for instance if the dephasing is zero, then in the limit of weak coupling, ΓL,ΓR → 0, κ diverges.

C. Nonzero offset, µ̄ 6= 0

  • Let us now go to the case where there is an offset of magnetization in the baths.
  • One should note though that integrable systems, such as their XX chain, do not thermalize for generic local Lindblad baths [26].
  • Out of equilibrium, when µ 6= 0, the solution is actually very similar to the one with zero µ̄.

IV. THE NESS IS NON-GAUSSIAN

  • I.e., that the Wick theorem does not hold.the authors.
  • A system of spin-1/2 particles can be mapped to spinless fermions using the Jordan-Wigner transformation.
  • Whether it is nevertheless equivalent to some existing solvable model is at present unknown.

A. Matrix product operator ansatz

  • The authors have numerical indications though that the Schmidt rank, i.e., a number of nonzero Schmidt coefficients, for a bipartite cut after the first m spins is 4m.
  • Looking at the series solution for NESS (11) the authors can see that the largest connected term in the r-th order µrR(r) (i.e., r-point connected correlation function) scales for large n as ∼ br n = 1/nr−1 and comes from the connected correlation of r σzs.
  • Another interesting point is that for µn > νc the second largest Schmidt coefficient is independent of n and scales as λ2 ∼ µ 2/n0.

V. NONEQUILIBRIUM PHASE TRANSITION

  • From the exact solution the authors can see that the NESS undergoes a transition from a state without long-range correlations for γ = 0, to the one with long-range correlations for γ.
  • In the phase with long-range correlations two-point z − z correlations scale as ∼ µ2/n [9] and are therefore of purely nonequilibrium origin.
  • The correlation function has a plateau because in the thermodynamic limit the decay of Ci,j with the distance between indices |i− j| gets increasingly slower (25).
  • Of interest for nonequilibrium phase transitions is therefore the second largest eigenvalue λ2 of the Lindblad superoperator L, or in particular the gap ∆, ∆ = −λ2.
  • Because the authors in general expect the relaxation time, in the case of local coupling to baths at chain ends, to grow with the system size at least as ∝ n – larger system simply needs more time to relax –, the gap is expected to decrease with n, even if they are not at the nonequilibrium phase transition point.

VI. SUMMARY

  • The authors have provided exact expressions for all one-point, two-point and three-point connected correlations in the nonequilibrium stationary state of the XX model with dephasing.
  • The nonequilibrium stationary state is non-Gaussian because the Wick theorem does not apply.
  • In the thermodynamic and weak-driving limit the solution can be written in terms of a matrix product ansatz with matrices of fixed dimension 4.
  • At zero dephasing the model exhibits a nonequilibrium phase transition from a state 10 with only nearest-neighbor correlations to a state possessing long-range correlations.
  • It is conjectured that at a quantum nonequilibrium phase transition point the gap of the superoperator closes with the system size more rapidly than in the vicinity of the transition point.

Did you find this useful? Give us your feedback

Figures (2)

Content maybe subject to copyright    Report

NBER WORKING PAPER SERIES
CULTURAL BIASES IN ECONOMIC EXCHANGE
Luigi Guiso
Paola Sapienza
Luigi Zingales
Working Paper 11005
http://www.nber.org/papers/w11005
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
December 2004
We would like to thank Giuseppe Nicoletti for providing the OECD dataset, Michele Gambera for providing
the Morningstar portfolio data, and Roc Armenter for excellent research assistantship. We also thank
Franklin Allen, Marianne Baxter, Patricia Ledesma, Mitchell Petersen, Andrei Shleifer, Rene Stulz, and
Samuel Thompson for very helpful comments. We benefited from the comments of participants to seminars
at the European University Institute, Wharton, Northwestern University, the University of Chicago,
University of Wisconsin, NBER Corporate Finance, International Trade, and Behavioral Meetings. Luigi
Guiso acknowledges financial support from MURST, and the EEC. Paola Sapienza acknowledges financial
support from the Center for International Economics and Development at Northwestern University. Luigi
Zingales acknowledges financial support from the Center for Research on Security Prices and the Stigler
Center at the University of Chicago. The views expressed herein are those of the author(s) and do not
necessarily reflect the views of the National Bureau of Economic Research.
© 2004 by Luigi Guiso, Paola Sapienza, and Luigi Zingales. All rights reserved. Short sections of text, not
to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including ©
notice, is given to the source.
Cultural Biases in Economic Exchange
Luigi Guiso, Paola Sapienza, and Luigi Zingales
NBER Working Paper No. 11005
December 2004
JEL No. G0, G3, F1
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.
Luigi Guiso
University of Chicago GSB
5807 South Woodlawn Avenue
Chicago, IL 60637
lguiso@gsb.uchicago.edu
Paola Sapienza
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
paola-sapienza@northwestern.edu
Luigi Zingales
University of Chicago GSB
5807 South Woodlawn Avenue
Chicago, IL 60637
and NBER
luigi.zingales@chicagogsb.edu
We always have been , we are, and I hope that we always shall be detested in France.
Duke of Wellington
The We bster dictionary defines culture as “the customary beliefs, social forms, and material
traits of a racial, religious, or social group.” In this paper we focus on the first dimension of
culture (i.e., customary beliefs) and we ask how these customary beliefs (as those expressed by
the Duke of Wellington) impact economic choices.
In doing so we face both a theoretical and an em pirical challenge. From the theoretical point
of view, we nee d to explain how these customary beliefs may enter into the standard economic
model. Since Muth (1960, 1961) and Lucas (1976) nearly all research in economics has endog-
enized beliefs, under the rational expectations assumption that subjective and objective beliefs
coincide. But the assumption that agents share common prior beliefs (necessary for rational
expectations) is increasingly under attack. The common-prior assumption is quite restrictive
and does not allow agents to ”agree to disagree” (Aumann (1976)). Perfectly rational people
might have different priors. In fact, the common use of the word rational only requires beliefs
to be Bayesian. But the Bayesian paradigm does not address the ques tion of the rationality of
prior beliefs (Gilboa, Postlewaite, and Schmeidler, 2004). One possible way out is to develop a
framework for a rational choice of prior beliefs by an individual. This is the avenue pursued by
Brunnermeier and Parker (2004) in their optimal expectation approach. Alternatively, one can
analyze empirically how these prior beliefs are influenced by culture. Paraphrasing Einstein we
identify culture as ”the collection of prejudices acquired by age eighteen.”
1
. This is the avenue
we will follow in this paper.
In particular, we focus on the effect that customary beliefs have on international trade and
investments via the effect they have on the degree of trust citizens of a country have toward
citizens of other countries. In a world where contract enforcement is imperfect and/or where
it is impossible or prohibitively expensive to write all future contingencies into contracts, the
degree of mutual trust is an essential comp onent in any economic exchange. Lack of trust will
prevent otherwise profitable trade and investment opportunities. In relational contracts what
matters is personalized trust, the mutual trust people developed through repeated interactions
(Grief, 1993). For the development of anonymous markets, however, what matters is generalized
trust, the trust people have toward a random member of an identifiable group (e.g., McEvily et
1
On the economic effect of prejudice see the pioneer work of Becker (1957)
1
al. (2002) and Guiso, Sapienza, and Zingales (GSZ)(2004)). In this paper, we focus on the role
customary beliefs have on trust and argue that culture plays a role in the formation of trust,
beyond what objective considerations would justify. We then, show how these cultural biases
impact international trade and investments.
From an empirical point of view, the challenge we face is how to separate customary beliefs
from rational expectation beliefs. We do so in two steps. First, we use a rich dataset that
reports the trust that individuals in a set of countries have towards generic individuals in each
country that belongs to the set. Under rational expectations, a country of destination fixed effect
captures the true trustworthiness of the citizens of that country. This allows us to separate the
objective characteristics from customary beliefs.
To see how it works consider a recent survey carried out by the 3i/Cranfield European
Enterprise Center, where European managers of five different nationalities were asked to rank
managers of the same five countries on the basis of their trustworthiness.
2
The average results,
which are summarized in the table below, highlight three facts.
Britain Germany France Italy Spain
British view 1 2 4 5 3
German view 2 1 3 5 4
French view 4 1 2 5 3
Italian view 3 1 2 4 5
Spanish view 2 1 4 5 3
First, there s eem s to be s ome common views, which in a rational expectations world coin-
cide 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 “home-
country 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. This seems inconsistent with the ranking chosen by
eve ry other group. British m anagers reciprocate (as the duke of Wellington’s opening quote
2
In total 1,016 managers (managing companies under 500 employees) responded from five major EC
countries: Britain (433 responses), France (127), Germany (135), Italy (185) and Spain (136). See
http://www.cranfield.ac.uk/docs/spss/spss.html.
2
seems to suggest).
These facts are not peculiar to this dataset. As we will show, they are exactly replicated
in an independent and broader survey (Eurobarometer). Hence, we will use the idiosyncratic
component of trust in this larger dataset as a proxy for the “customary beliefs.”
Even this measure of ”customary beliefs” , however, could be contaminated by other factors.
For example, the average Canadian has more information about Americans than the average
Japanese and this b ette r information can significantly affect (upward or downward) her degree
of trust.
Hence, the second step in our procedure is to regress the residual trust on a series of variables
that proxy for difference in information and another set that proxy for culture.
As measures of information we use the geographical distance between the two countries, their
proximity, and the commonality between the two languages.
3
We also collec ted the number of
times a country name appears in the headlines of the major newspaper in each country, as a
measure of the degree of information this country has. These variables seem to have limited
power to explain why some countries trust others more. If anything better newspapers’ coverage
leads to less trust.
A variable that could proxy both for information and for culture is the commonality in the
legal systems. We find that citize ns from a country trust more citizens from another when the
two countries share the same type of legal system (i.e., both have a civil code or both a common
law system).
But we also find more convincing evidence of the effect of cultural stereotypes on trust. For
example, we know that people with similar cultural backgrounds and similar appearances tend
to trust each other more (McPherson et al. 2001). As a measure of similarity in culture that is
unrelated to better objective reasons to trust we use commonality of religion. As a measure of
somatic similarities, we use the genetic distance between indigenous populations, as computed
by Cavalli Sforza et al. (1993). While genetic distance does not necessarily express itself in
somatic differences, it does represent the evolutionary distance between two populations.
We find that both these variables are important in explaining trust, not only from a statistical
point of view, but also from an economic one. Commonality of religion has a positive impact
and its effect is important: compared to a case where religion is not shared, a match where 90
3
In fact, the commonality b etween the two languages is also a proxy for a common culture. Thus, by attributing
all its effect to information we are biasing our results against finding any effect of culture.
3
Citations
More filters
Journal Article•DOI•
Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

[...]

Patricia M. Dechow1, Weili Ge2, Catherine M. Schrand3•
University of California, Berkeley1, University of Washington2, University of Pennsylvania3
01 Dec 2010-Journal of Accounting and Economics
TL;DR: In this paper, the authors point out that the quality of earnings is a function of the firm's fundamental performance and suggest that the contribution of a firms fundamental performance to its earnings quality is suggested as one area for future work.

2,140 citations

Journal Article•DOI•
Unobservable Selection and Coefficient Stability: Theory and Evidence

[...]

Emily Oster1•
Brown University1
03 Apr 2019-Journal of Business & Economic Statistics
TL;DR: This article developed an extension of the theory that connects bias explicitly to coefficient stability and showed that it is necessary to take into account coefficient and R-squared movements, and showed two validation exercises and discuss application to the economics literature.
Abstract: A common approach to evaluating robustness to omitted variable bias is to observe coefficient movements after inclusion of controls. This is informative only if selection on observables is informative about selection on unobservables. Although this link is known in theory in existing literature, very few empirical articles approach this formally. I develop an extension of the theory that connects bias explicitly to coefficient stability. I show that it is necessary to take into account coefficient and R-squared movements. I develop a formal bounding argument. I show two validation exercises and discuss application to the economics literature. Supplementary materials for this article are available online.

2,115 citations

Journal Article•DOI•
The Slave Trade and the Origins of Mistrust in Africa

[...]

Nathan Nunn1, Leonard Wantchekon2•
Harvard University1, New York University2
01 Dec 2011-The American Economic Review
TL;DR: This article examined the long-term impacts of Africa's slave trade and found that individuals whose ancestors were heavily raided during the slave trade are less trusting today, which may persist to this day.
Abstract: In a recent study, Nunn (2008) examines the long-term impacts of Africa’s slave trade. He finds that the slave trade, which occurred over a period of more than 400 years, had a significant negative effect on long-term economic development. Although the article arguably identifies a negative causal relationship between the slave trade and income today, the analysis is unable to establish the exact causal mechanisms underlying this reduced-form relationship. In this article, we examine one of the channels through which the slave trade may affect economic development today. Combining contemporary individual-level survey data with historical data on slave shipments by ethnic group, we ask whether the slave trade caused a culture of mistrust to develop within Africa. Initially, slaves were captured primarily through state organized raids and warfare, but as the trade progressed, the environment of ubiquitous insecurity caused individuals to turn on others—including friends and family members—and to kidnap, trick, and sell each other into slavery (Sigismund Wilhelm Koelle 1854; P. E. H. Hair 1965; Charles Piot 1996). We hypothesize that in this environment, a culture of mistrust may have evolved, which may persist to this day. We show that current differences in trust levels within Africa can be traced back to the transatlantic and Indian Ocean slave trades. Combining contemporary individual-level survey data with historical data on slave shipments by ethnic group, we find that individuals whose ancestors were heavily raided during the slave trade are less trusting today. Evidence from a variety of identification strategies suggests that the relationship is causal. Examining causal mechanisms, we show that most of the impact of the slave trade is through factors that are internal to the individual, such as cultural norms, beliefs, and values. (JEL J15, N57, Z13)

1,325 citations

Journal Article•DOI•
Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade

[...]

Nathan Nunn1•
Canadian Institute for Advanced Research1
01 May 2007-Quarterly Journal of Economics
TL;DR: This paper found that countries with better contract enforcement specialize in industries that rely heavily on relationship-specific investments, and this is true even after controlling for traditional determinants of comparative advantage such as endowments of capital and skilled labor.
Abstract: When relationship-specific investments are necessary for production, under-investment occurs if contracts cannot be enforced. The efficiency loss from under-investment will differ across industries depending on the importance of relationship-specific investments in the production process. As a consequence, a country’s contracting environment may be an important determinant of comparative advantage. To test for this, I construct measures of the efficiency of contract enforcement across countries and the importance of relationship-specific investments across industries. I find that countries with better contract enforcement specialize in industries that rely heavily on relationshipspecific investments. This is true even after controlling for traditional determinants of comparative advantage such as endowments of capital and skilled labor.

1,026 citations

Journal Article•DOI•
Culture and Institutions

[...]

Alberto Alesina1, Paola Giuliano2•
Harvard University1, University of California, Los Angeles2
01 Dec 2015-Journal of Economic Literature
TL;DR: A growing body of empirical work measuring different types of cultural traits has shown that culture matters for a variety of economic outcomes as mentioned in this paper, focusing on one specific aspect of the relevance of culture: its relationship to institutions.
Abstract: A growing body of empirical work measuring different types of cultural traits has shown that culture matters for a variety of economic outcomes. This paper focuses on one specific aspect of the relevance of culture: its relationship to institutions. We review work with a theoretical, empirical, and historical bent to assess the presence of a two-way causal effect between culture and institutions. ( JEL D02, D72, I32, J12, Z13)

977 citations

References
More filters
Journal Article•DOI•
Birds of a Feather: Homophily in Social Networks

[...]

Miller McPherson, Lynn Smith-Lovin1, James Cook2•
University of Arizona1, Duke University2
01 Aug 2001-Review of Sociology
TL;DR: The homophily principle as mentioned in this paper states that similarity breeds connection, and that people's personal networks are homogeneous with regard to many sociodemographic, behavioral, and intrapersonal characteristics.
Abstract: Similarity breeds connection. This principle—the homophily principle—structures network ties of every type, including marriage, friendship, work, advice, support, information transfer, exchange, comembership, and other types of relationship. The result is that people's personal networks are homogeneous with regard to many sociodemographic, behavioral, and intrapersonal characteristics. Homophily limits people's social worlds in a way that has powerful implications for the information they receive, the attitudes they form, and the interactions they experience. Homophily in race and ethnicity creates the strongest divides in our personal environments, with age, religion, education, occupation, and gender following in roughly that order. Geographic propinquity, families, organizations, and isomorphic positions in social systems all create contexts in which homophilous relations form. Ties between nonsimilar individuals also dissolve at a higher rate, which sets the stage for the formation of niches (localize...

15,738 citations

Posted Content•
Law and Finance

[...]

Rafael La Porta1, Rafael La Porta2, Florencio Lopez de Silanes2, Florencio Lopez de Silanes3, Andrei Shleifer4, Andrei Shleifer2, Robert W. Vishny2, Robert W. Vishny5 •
Dartmouth College1, National Bureau of Economic Research2, Skema Business School3, Harvard University4, University of Chicago5
01 Jul 1996-Social Science Research Network
TL;DR: This paper examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common law countries generally have the best, and French civil law countries the worst, legal protections of investors.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

14,563 citations

Journal Article•DOI•
Law and Finance

[...]

Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, Robert W. Vishny
01 Dec 1998-Journal of Political Economy
TL;DR: In this article, the authors examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common-law countries generally have the strongest, and French civil law countries the weakest, legal protections of investors, with German- and Scandinavian-civil law countries located in the middle.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

13,984 citations

Journal Article•DOI•
Large sample properties of generalized method of moments estimators

[...]

Lars Peter Hansen
01 Jul 1982-Econometrica

13,118 citations

Journal Article•DOI•
How Much Should We Trust Differences-In-Differences Estimates?

[...]

Marianne Bertrand1, Esther Duflo2, Sendhil Mullainathan2•
University of Chicago1, National Bureau of Economic Research2
01 Feb 2004-Quarterly Journal of Economics
TL;DR: In this article, the authors randomly generate placebo laws in state-level data on female wages from the Current Population Survey and use OLS to compute the DD estimate of its "effect" as well as the standard error of this estimate.
Abstract: Most papers that employ Differences-in-Differences estimation (DD) use many years of data and focus on serially correlated outcomes but ignore that the resulting standard errors are inconsistent. To illustrate the severity of this issue, we randomly generate placebo laws in state-level data on female wages from the Current Population Survey. For each law, we use OLS to compute the DD estimate of its “effect” as well as the standard error of this estimate. These conventional DD standard errors severely understate the standard deviation of the estimators: we find an “effect” significant at the 5 percent level for up to 45 percent of the placebo interventions. We use Monte Carlo simulations to investigate how well existing methods help solve this problem. Econometric corrections that place a specific parametric form on the time-series process do not perform well. Bootstrap (taking into account the autocorrelation of the data) works well when the number of states is large enough. Two corrections based on asymptotic approximation of the variance-covariance matrix work well for moderate numbers of states and one correction that collapses the time series information into a “pre”- and “post”-period and explicitly takes into account the effective sample size works well even for small numbers of states.

9,397 citations

Related Papers (5)
Does culture affect economic outcomes

[...]

06 Feb 2006-Journal of Economic Perspectives
Luigi Guiso, Luigi Guiso, Luigi Guiso, Paola Sapienza, Luigi Zingales, Luigi Zingales, Luigi Zingales 
Does Social Capital Have an Economic Payoff? A Cross-Country Investigation

[...]

01 Nov 1997-Quarterly Journal of Economics
Stephen Knack, Philip Keefer
Law and Finance

[...]

01 Dec 1998-Journal of Political Economy
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, Robert W. Vishny 
Culture and institutions: economic development in the regions of europe

[...]

01 Jun 2010-Journal of the European Economic Association
Guido Tabellini
Trust and Growth

[...]

01 Mar 2001-The Economic Journal
Paul J. Zak, Stephen Knack
Frequently Asked Questions (8)
Q1. What contributions have the authors mentioned in the paper "Nber working paper series cultural biases in economic exchange" ?

The views expressed herein are those of the author ( s ) and do not necessarily reflect the views of the National Bureau of Economic Research. 

Only future research will be able to tell. 

The effect of trust is consistently stronger for differentiated goods: trade increases 36 percent versus 16 percent in response to one-standard deviation increase in trust. 

Characteristics of the country expressing and receiving trust can (controlling for time variation) at most explain between 44 and 64% of the variability in trust depending on how the aggregate trust of a country’s citizens is computed. 

The authors find that the significance level is higher than 3% , where Stock and Yogo (2002) recommend an F test with at least a 5% significance level. 

In such a case, the role played by trust would be second order: except for very high level of risk aversion, trust modelled in this way is bound to have very little impact on decisions. 

These fixed effects will capture any variable that is specific to the country and affects its average trust and trustworthiness, such as the level of protection that contracts receive, the enforcement granted by social punishment, the constraints that individuals in a country have in their behaviors due to binding cultural norms. 

As one would expect if these cultural biases against an enemy fade over time, the impact of recent wars is five times that of distant wars.