Vanishing borders: ethnicity and trade costs at the origin of the Yugoslav market

This article exploits the creation of a paradigmatic multi-ethnic state, Yugoslavia, to examine if, to what extent, and why the effect of ethnic ties on trade costs changes over time. We compile and examine a panel of over 550,000 inter-urban price gaps spanning the area of Yugoslavia in the decades before and after the Yugoslav unification of 1918. Controlling for observable trade costs, we find that crossing the border between Serbia and Austria-Hungary significantly increased price gaps before the First World War. Ethno-religious differences explained a large share of this border effect in pre-unification Yugoslavia, but their influence vanished over time. This decline began about twelve years before the unification, and is visible both in city-pairs that were separated by the pre-war border and in those that were not. These patterns suggest that nation-building, rather than a weakening incentive to rely on private order institutions, was the main unifying factor.