Cultural proximity and trade

Abstract

Cultural proximity increases bilateral trade flows through a trade-cost and a bilateral-affinity (preferences) channel. Conventional measures of cultural proximity, such as common language, common religion, etc., do not allow to separately quantify those channels empirically. We argue that quality-adjusted Eurovision Song Contest (ESC) scores can be used as dyadic, time-variant information on European countries’ cultural proximity. Assuming that the tradecost related component of cultural proximity is time-invariant, in a gravity model of bilateral trade, the time dimension of the ESC data allows to identify the preferences effect. The validity of our identification strategy can be tested by exploiting the lack of systematic reciprocity in ESC scores. While we find robust evidence for a sizable preferences effect, the impact of cultural proximity on trade runs largely through the cost effect.