Home Bias in Trade within China: The Role of Trust

Zilong Li

No 202505, Working Papers from School of Economics, University College Dublin

Abstract: The home bias is a well-documented phenomenon highlighting how administrative borders hinder economic transactions. This paper estimates the magnitude of China’s provincial border effect using inter-provincial and intra-provincial trade data, with a particular focus on the role of trust in shaping these effects. To address potential endogeneity, I employ a novel instrumental variable leveraging provincial exaggerations highlighted by media during the Great Leap Forward. The analysis uncovers a significant provincial home bias, with provincial borders substantially reducing inter-provincial exports. Importantly, both the exporter-to-importer trust and the importer-to-exporter trust emerge as crucial mechanisms driving this effect.

Keywords: Home bias; Trust; Instrumental variable; Exaggeration; Great Leap Forward (search for similar items in EconPapers)
JEL-codes: F14 F15 F40 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2025-05
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