Abstract
AbstractThis paper sheds light on the impact of common native language and immigration—both jointly and separately—on imports. Common native language and immigrant networks stimulate bilateral trade relationships by reducing transaction costs through both market creation and the removal of information asymmetries. Whereas evidence on the importance of weak links for trade provides support for the first channel, the need for additional immigrants does not decline, if the second mechanism proves to be a driver of trade relationships. For estimation of a causal and nonlinear effect of the two—common native language and immigration—on imports, we employ a flexible identification strategy, which allows common native language and migration to be endogenous. The results suggest that both common native language and immigration raise imports, but the impact of common native language is ever increasing with its level, whereas that of immigration is of declining importance as its level increases.
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