Thursday, August 5, 2010

Don't Offend les Amerloques

Via Trade Diversion:

Guy Michaels & Xiaojia Zhi, 2010. “Freedom Fries,” American Economic Journal: Applied Economics, vol. 2(3), pages 256-81, July.
Do firms always choose the cheapest suitable inputs, or can group attitudes affect their choices? To investigate this question, we examine the deterioration of relations between the United States and France from 2002-2003, when France’s favorability rating in the US fell by 48 percentage points. We estimate that the worsening attitudes reduced bilateral trade by about 9 percent and that trade in inputs probably declined similarly, by about 8 percent. We use these estimates to calculate the average decrease in firms’ willingness to pay for French (or US) commodities when attitudes worsened.