When studying the formation of trade between two countries, traditional modeling has described it as being primarily dependent on individual and bilateral characteristics of the two trading partners. It is likely, however, that trade is dependent not only on the two countries involved but on the...

Using new data on linguistic diversity across and within countries, we examine novel channels though which language affects trade patterns and economic welfare. We find that linguistic similarity within a country accounts for about 10 percent of estimated "home bias", demonstrating the...