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Traders, Courts and the Home Bias Puzzle

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  • Turrini, Alessandro Antonio
  • van Ypersele, Tanguy

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 differs, so that legal costs are higher when business is done abroad. Using a matching 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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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3228.

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Date of creation: Feb 2002
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Handle: RePEc:cpr:ceprdp:3228

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

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References

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  1. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  2. 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.
  3. 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.
  4. Keith Head & Thierry Mayer, 2000. "Non-Europe: The magnitude and causes of market fragmentation in the EU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(2), pages 284-314, June.
  5. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
  6. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
  7. John F. Helliwell, 1996. "Do National Borders Matter for Quebec's Trade?," Canadian Journal of Economics, Canadian Economics Association, vol. 29(3), pages 507-22, August.
  8. Casella, Alessandra, 1992. "Arbitration in International Trade," CEPR Discussion Papers 721, C.E.P.R. Discussion Papers.
  9. 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.
  10. James E. Rauch, 1996. "Trade and Search: Social Capital, Sogo Shosha, and Spillovers," NBER Working Papers 5618, National Bureau of Economic Research, Inc.
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  13. 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.
  14. Marimon, R. & Zilibotti, F., 1998. "Unemployment vs. Mismatch of Talents," Papers 661, Stockholm - International Economic Studies.
  15. 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.
  16. 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.
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Citations

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Cited by:
  1. Tao Xiang & Jikun Huang & d’Artis Kancs & Scott Rozelle & Jo Swinnen, 2010. "Food Standards and Welfare: A General Equilibrium Model with Market Imperfections," LICOS Discussion Papers 26310, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  2. Noussair, Charles & Plott, Charles & Riezman, Raymond, 2007. "Production, trade, prices, exchange rates and equilibration in large experimental economies," European Economic Review, Elsevier, vol. 51(1), pages 49-76, January.
  3. Henk Kox & Arjan Lejour, 2005. "Regulatory heterogeneity as obstacle for international services trade," CPB Discussion Paper 49, CPB Netherlands Bureau for Economic Policy Analysis.
  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. L. Colombo & L. Lambertini & A. Mantovani, 2003. "Endogenous Transportation Technology in a Cournot Differential Game with Intraindustry Trade," Working Papers 479, Dipartimento Scienze Economiche, Universita' di Bologna.
  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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