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Traders, Courts, and the Home Bias Puzzle

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  • Alessandro Turrini

    ()
    (Department of Economics, University of Bergamo)

  • Tanguy Van Ypersele

    ()
    (Department of Economics, University of Namur)

Abstract

Recent evidence shows that the "home bias puzzle" in international trade may be associated with the mere presence of national borders (McCallum (1995)). In this paper we provide a theoretical framework to explain why borders may matter so much for trade. Our argument is that even between perfectly integrated and similar countries the legal system di¤ers, so that legal costs are higher when business is done abroad. Using a matchig model of trade, we show that the home bias is associated with both less searching foreign sellers in the home market and a lower probability of cross-border matches being accepted. In industries characterized by high turnover legal costs may reduce trade because reducing the mass of searching foreign sellers and increasing at the same time that of searching domestic sellers.

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File URL: http://aisberg.unibg.it/bitstream/10446/169/1/WPEco05(2002)Turrini.pdf
File Function: Version, 10-2002
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Bibliographic Info

Paper provided by University of Bergamo, Department of Economics in its series Working Papers with number 0205.

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Length: 28 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:brg:wpaper:0205

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Keywords: Cross-border trade; legal costs; matching;

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References

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  1. Casella, Alessandra, 1996. "On market integration and the development of institutions: The case of international commercial arbitration," European Economic Review, Elsevier, vol. 40(1), pages 155-186, January.
  2. Alessandra Casella., 1992. "Arbitration in International Trade," Center for International and Development Economics Research (CIDER) Working Papers C92-003, University of California at Berkeley.
  3. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December.
  4. Dani Rodrik, 2000. "How Far Will International Economic Integration Go?," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 177-186, Winter.
  5. Keith Head & Thierry Mayer, 2004. "Non-Europe : the magnitude and causes of market fragmentation in the EU," Cahiers de la Maison des Sciences Economiques bla99004a, Université Panthéon-Sorbonne (Paris 1).
  6. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  7. Chen, Natalie, 2002. "Intra-national versus International Trade in the European Union: Why do National Borders Matter?," CEPR Discussion Papers 3407, C.E.P.R. Discussion Papers.
  8. Marimon, Ramon & Zilibotti, Fabrizio, 1999. "Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits," Economic Journal, Royal Economic Society, vol. 109(455), pages 266-91, April.
  9. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA.
  10. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  11. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
  12. John F. Helliwell, 1995. "Do National Borders Matter for Quebec's Trade?," NBER Working Papers 5215, National Bureau of Economic Research, Inc.
  13. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  14. Volker Nitsch, 2000. "National borders and international trade: evidence from the European Union," Canadian Journal of Economics, Canadian Economics Association, vol. 33(4), pages 1091-1105, November.
  15. Marimon, R. & Zilibotti, F., 1998. "Unemployment vs. Mismatch of Talents," Papers 661, Stockholm - International Economic Studies.
  16. James E. Rauch, 1996. "Trade and Search: Social Capital, Sogo Shosha, and Spillovers," NBER Working Papers 5618, National Bureau of Economic Research, Inc.
  17. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
  18. James E. Anderson & Douglas Marcouiller, 1999. "Trade, Insecurity, and Home Bias: An Empirical Investigation," NBER Working Papers 7000, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Xiang, Tao & Huang, Jikun & Kancs, d'Artis & Swinnen, Johan F.M., 2009. "Standards Driven Rural Development: A General Equilibrium Model with Market Imperfections," 2009 Conference, August 16-22, 2009, Beijing, China 51476, International Association of Agricultural Economists.
  2. Noussair, Charles & Plott, Charles & Riezman, Raymond, 2003. "Production, trade, prices, exchange rates and equilibration in large experimental economies," Working Papers 1188, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Colombo, Luca & Lambertini, Luca & Mantovani, Andrea, 2009. "Endogenous transportation technology in a Cournot differential game with intraindustry trade," Japan and the World Economy, Elsevier, vol. 21(2), pages 133-139, March.
  4. José De Sousa & Anne-Célia Disdier, 2006. "La qualité du cadre juridique constitue-t-elle une barrière au commerce ?. Application aux économies en transition," Revue économique, Presses de Sciences-Po, vol. 57(1), pages 135-149.
  5. Henk Kox & Arjan Lejour, 2005. "Regulatory heterogeneity as obstacle for international services trade," CPB Discussion Paper 49, CPB Netherlands Bureau for Economic Policy Analysis.
  6. de Sausa, José & Disdier, Anne-Célia, 2002. "Legal framework as a trade barrier - evidence from transition countries : Hungarian, Romanian and Slovene examples," HWWA Discussion Papers 201, Hamburg Institute of International Economics (HWWA).

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