Home Bias in Trade within China: The Role of Trust

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.