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The Home-Market Effect and Bilateral Trade Patterns: A Reexamination of the Evidence

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Author Info
Cong S. Pham ()
Mary E. Lovely ()
Devashish Mitra ()

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Abstract

In this paper, we reexamine closely the empirical evidence for the home-market effect (HME) found by Hanson and Xiang (American Economic Review, 2004). We first show that evidence for the HME from their difference-in-difference gravity equation is sensitive to the way the independent variable of interest (i.e. the log of the ratio of GDPs of exporter pairs) is created. Moreover, regardless of how the sample is configured, the HME is found only in particular sub-samples of country pairs. Second, we find no evidence of the HME when we estimate the difference-in-difference gravity model on a truncated sample of positive trade flows. We also find that the magnitude of the estimated HME is sensitive to the value imputed to zero trade flows. Monte Carlo simulations show that the truncated OLS, the Eaton-Tamura Tobit and the Heckman sample-selection estimators outperform (in terms of both the bias and variation of the gravity estimates) Hanson and Xiang’s difference-in-difference estimator. Truncated OLS, ET-Tobit and Heckman estimation of the gravity equation using Hanson and Xiang’s data yield no evidence of the HME. Finally, evidence from data on exports from non-OECD countries and from Canadian provinces to the US states provides no support for the home-market effect.

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Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2009_12.

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Length: 29 pages
Date of creation: 12 Aug 2009
Date of revision:
Handle: RePEc:dkn:econwp:eco_2009_12

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  1. Eichengreen, Barry & Irwin, Douglas A., 1995. "Trade blocs, currency blocs and the reorientation of world trade in the 1930s," Journal of International Economics, Elsevier, vol. 38(1-2), pages 1-24, February. [Downloadable!] (restricted)
  2. DANIEL LEDERMAN & ÇAGLAR ÖZDEN, 2007. "Geopolitical Interests And Preferential Access To U.S. Markets," Economics and Politics, Blackwell Publishing, vol. 19(2), pages 235-258, 07. [Downloadable!] (restricted)
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  3. Robert Feenstra & Hiau Looi Kee, 2004. "On the Measurement of Product Variety in Trade," American Economic Review, American Economic Association, vol. 94(2), pages 145-149, May. [Downloadable!]
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  4. Gordon H. Hanson & Chong Xiang, 2004. "The Home-Market Effect and Bilateral Trade Patterns," American Economic Review, American Economic Association, vol. 94(4), pages 1108-1129, September. [Downloadable!]
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  5. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 441-487, 05. [Downloadable!] (restricted)
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  6. Keith Head & John Ries, 1998. "Immigration and Trade Creation: Econometric Evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 47-62, February.
  7. James E. Rauch & Vitor Trindade, 2002. "Ethnic Chinese Networks In International Trade," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 116-130, February. [Downloadable!] (restricted)
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  8. Gabriel J. Felbermayr & Wilhelm Kohler, 2006. "Exploring the Intensive and Extensive Margins of World Trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 142(4), pages 642-674, December. [Downloadable!] (restricted)
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