Vanishing Borders: Ethnicity and Trade Costs at the Origin of the Yugoslav Market

This article uses the creation of a paradigmatic multi-ethnic state, Yugoslavia, in 1918, and a novel large dataset of grain prices to examine the effect of ethnicity on trade costs when borders changed. Controlling for transport costs and import tariffs, we find a large but transitory border effect. Ethno-religious differences initially significantly increased price gaps, but their negative influence vanished over time as well. The decline was virtually complete about 16 years before unification and involved city-pairs divided by the border, supporting the hypothesis that Yugoslav unification nationalism fostered trust across ethno-religious networks of international traders.