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The home-market effect and bilateral trade patterns: A reexamination of the evidence

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  • Pham, Cong S.
  • Lovely, Mary E.
  • Mitra, Devashish

Abstract

This paper finds that the evidence for the home market effect (HME) found by Hanson and Xiang (AER, 2004) is sensitive to the way the dependent and the independent variables are constructed. Second, we also find that the HME evidence goes away when we estimate their difference-in-difference gravity model on a truncated sample of positive trade flows. With Eaton–Tamura–Tobit, Heckman, and Helpman–Melitz–Rubinstein estimation of the gravity equation using Hanson and Xiang's data, we are unable to find any evidence for the HME. Finally, the HME evidence is also absent for a sample of Canadian provinces' exports to U.S. states. All of our results, taken together, do not reject the existence of the HME in general but rather suggest that the HME results found by Hanson and Xiang may not be robust.

Suggested Citation

  • Pham, Cong S. & Lovely, Mary E. & Mitra, Devashish, 2014. "The home-market effect and bilateral trade patterns: A reexamination of the evidence," International Review of Economics & Finance, Elsevier, vol. 30(C), pages 120-137.
    • Handle: RePEc:eee:reveco:v:30:y:2014:i:c:p:120-137
    DOI: 10.1016/j.iref.2013.10.005
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    Cited by:

    1. Jung, Benjamin & Felbermayr, Gabriel, 2015. "Market Size Effects in New New Trade Theory," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113038, Verein für Socialpolitik / German Economic Association.
    2. Hege Medin, 2017. "The reverse home-market effect in exports: a cross-country study of the extensive margin of exports," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(2), pages 301-325, May.
    3. Huang, Yo-Yi & Huang, Deng-Shing, 2014. "Big vs. small under free trade: Market size and size distribution of firms," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 175-189.

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    More about this item

    Keywords

    Gravity equation; Home-market effect; Zero trade flows;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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