An empirical approach to measure unobserved cultural relations using music trade data

Cultural relations between countries influence the exchange of cultural goods. This study provides novel knowledge of unobserved cultural relations by mea- suring the effect of cultural relations on the trade in recorded music compact discs, using the gravity model of international trade. We consider such relations as unob- served heterogeneity and introduce into the standard model a factor structure (multi- ple interactive fixed effect terms) to extract the features of unobserved relations, in- cluding cultural relations, between trading countries. We also consider the existence of multiple zero-trade country pairs and introduce a selectivity structure to account for zero flows. After the estimation procedure, we derive the implications of cultural relations from the estimated values of interactive terms using multivariate analysis. From the results of post-estimation analysis, the estimated values of our interactive terms could be interpreted as the effect of cultural relations. In addition to the positive effect of cultural proximity on trade, which existing studies have revealed, our inter- active terms could capture (i) the negative effect of cultural proximity on music trade, such as home consumption bias, (ii) the positive effect of modern music consumption trend on music trade, which is unexplained by cultural proximity based on traditional cultural studies.