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The More We Die, The More We Sell? A Simple Test of the Home-Market Effect

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  • A. Costinot,
  • D. Donaldson,
  • Margaret Kyle

    (CERNA i3 - Centre d'économie industrielle i3 - Mines Paris - PSL (École nationale supérieure des mines de Paris) - PSL - Université Paris sciences et lettres - I3 - Institut interdisciplinaire de l’innovation - CNRS - Centre National de la Recherche Scientifique)

  • H. Williams,

Abstract

The home-market effect, first hypothesized by Linder (1961) and later formalized by Krugman (1980), is the idea that countries with larger demand for some products at home tend to have larger sales of the same products abroad. In this paper, we develop a simple test of the home-market effect using detailed drug sales data from the global pharmaceutical industry. The core of our empirical strategy is the observation that a country’s exogenous demographic composition can be used as a predictor of the diseases that its inhabitants are most likely to die from and, in turn, the drugs that they are most likely to demand. We find that the correlation between predicted home demand and sales abroad is positive and greater than the correlation between predicted home demand and purchases from abroad. In short, countries tend to be net sellers of the drugs that they demand the most, as predicted by Linder (1961) and Krugman (1980).
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Suggested Citation

  • A. Costinot, & D. Donaldson, & Margaret Kyle & H. Williams,, 2016. "The More We Die, The More We Sell? A Simple Test of the Home-Market Effect," Working Papers hal-01448519, HAL.
    • Handle: RePEc:hal:wpaper:hal-01448519
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    9. Xavier Jaravel & Erick Sager, 2019. "What are the price effects of trade? Evidence from the US and implications for quantitative trade models," CEP Discussion Papers dp1642, Centre for Economic Performance, LSE.
    10. Stephen J. Redding, 2020. "Trade and Geography," NBER Working Papers 27821, National Bureau of Economic Research, Inc.
    11. Pablo Fajgelbaum & Pinelopi K. Goldberg & Patrick J. Kennedy & Amit Khandelwal & Daria Taglioni, 2021. "The US-China Trade War and Global Reallocations," NBER Working Papers 29562, National Bureau of Economic Research, Inc.
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    14. Asier Minondo, 2017. "Fundamental Versus Granular Comparative Advantage: An Analysis Using Chess Data," Kyklos, Wiley Blackwell, vol. 70(3), pages 425-455, August.
    15. Cong Peng, 2019. "Does e-commerce reduce traffic congestion? Evidence from Alibaba Single Day shopping event," CEP Discussion Papers dp1646, Centre for Economic Performance, LSE.
    16. Sophie Hatte & Pamina Koenig, 2020. "The Geography of NGO Activism against Multinational Corporations," The World Bank Economic Review, World Bank, vol. 34(1), pages 143-163.
    17. Holger Breinlich & Elsa Leromain & Dennis Novy & Thomas Sampson, 2021. "Import liberalization as export destruction? Evidence from the United States," CEP Discussion Papers dp1779, Centre for Economic Performance, LSE.
    18. Peng, Cong, 2019. "Does e-commerce reduce traffic congestion? Evidence from Alibaba Single Day shopping event," LSE Research Online Documents on Economics 103411, London School of Economics and Political Science, LSE Library.
    19. Kevin A. Bryan & Heidi L. Williams, 2021. "Innovation: Market Failures and Public Policies," NBER Working Papers 29173, National Bureau of Economic Research, Inc.
    20. Amitabh Chandra & Craig Garthwaite & Ariel Dora Stern, 2018. "Characterizing the Drug Development Pipeline for Precision Medicines," NBER Chapters, in: Economic Dimensions of Personalized and Precision Medicine, pages 115-157, National Bureau of Economic Research, Inc.
    21. Colin Davis & Ken‐ichi Hashimoto, 2023. "Innovation offshoring and reshoring with fully endogenous growth," Southern Economic Journal, John Wiley & Sons, vol. 90(1), pages 90-120, July.
    22. Jordan J. Norris, 2021. "The Home Market Effects in a Home-Biased Geography," Working Papers 20210072, New York University Abu Dhabi, Department of Social Science, revised Sep 2021.
    23. Jaravel, Xavier & Sager, Erick, 2019. "What are the price effects of trade? Evidence from the US for quantitative trade models," LSE Research Online Documents on Economics 103402, London School of Economics and Political Science, LSE Library.
    24. Lashkaripour, Ahmad, 2020. "Discrete trade," Journal of International Economics, Elsevier, vol. 126(C).

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    Keywords

    Home-Market Effect;

    JEL classification:

    • F1 - International Economics - - Trade

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