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Explaining Home Bias in Consumption: The Role of Intermediate Input Trade

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  • Russell Hillberry
  • David Hummels

Abstract

We show that 'home bias' in trade patterns will arise endogenously due to the co-location decisions of intermediate and final goods producers. Our model identifies four implications of home bias arising out of specialized industrial demands. Regions absorb different bundles of goods. Buyers and sellers of intermediate goods co-locate. Intermediate input trade is highly localized. The effect of spatial frictions on trade are magnified. These implications are examined and confirmed using a unique data source that matches the detailed subnational geography of shipments to the characteristics of the shipping establishments. Our results broaden the measurement and interpretation of home bias, and provide new evidence on the role of intermediate inputs in concentrating production.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9020.

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Date of creation: Jun 2002
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Publication status: published as Hillberry, Russell and David Hummels. “Intra-national Home Bias: Some Explanations." Review of Economics and Statistics 85 (2003): 1089-1092.
Handle: RePEc:nbr:nberwo:9020

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  1. Jeffrey A. Frankel & Ernesto Stein & Shang-Jin Wei, 1996. "Regional Trading Arrangement: Natural or Super-Natural?," NBER Working Papers 5431, National Bureau of Economic Research, Inc.
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  10. Russell H. Hillberry, 2002. "Aggregation bias, compositional change, and the border effect," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 517-530, August.
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  14. Frankel, Jeffrey A. & Stein, Ernesto & Wei, Shang-Jin, 1996. "Regional Trading Arrangements," Center for International and Development Economics Research, Working Paper Series qt5hf1z4rv, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  15. Krugman, Paul & Venables, Anthony J., 1993. "Integration, Specialization and Adjustment," CEPR Discussion Papers 886, C.E.P.R. Discussion Papers.
  16. David Hummels & Alexandre Skiba, 2002. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," NBER Working Papers 9023, National Bureau of Economic Research, Inc.
  17. Paul Krugman & Anthony Venables, 1993. "Integration, Specialization, and the Adjustment," NBER Working Papers 4559, National Bureau of Economic Research, Inc.
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  22. Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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