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Factor content of bilateral trade: the role of firm heterogeneity and transaction costs

  • d'Artis Kancs
  • Pavel Ciaian

The article studies the determinants of the factor content in foreign trade in countries from Central and Eastern Europe (CEE). The theoretical model relaxes several important assumptions such as factor price equalization, firm heterogeneity, and introduces technological differences into the standard Heckscher-Ohlin model. Based on the agricultural production and trade data for the CEE, we examine empirically three hypotheses, which relate cross-country differences in technology, relative factor abundance and transaction costs and market imperfections to the factor content of trade. We find that the first two hypotheses are confirmed by the majority of the developed EU countries, but rejected by roughly one half of the CEE transition country pairs. Second, we find that when accounting for the transaction costs of farm (re)organization, both hypotheses are confirmed by the majority of the CEE country pairs. These findings provide indirect evidence of market imperfections, and particularly, of transaction costs of farm (re)organization in the CEE. Copyright (c) 2010 International Association of Agricultural Economists.

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Article provided by International Association of Agricultural Economists in its journal Agricultural Economics.

Volume (Year): 41 (2010)
Issue (Month): 3-4 (05)
Pages: 305-317

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Handle: RePEc:bla:agecon:v:41:y:2010:i:3-4:p:305-317
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  1. Staiger, Robert W., 1986. "Measurement of the factor content of foreign trade with traded intermediate goods," Journal of International Economics, Elsevier, vol. 21(3-4), pages 361-368, November.
  2. d'Artis Kancs, 2007. "Trade growth in a heterogeneous firm model: Evidence from South Eastern Europe," Working Papers 07-09, Asociación Española de Economía y Finanzas Internacionales.
  3. Schluter, Gerald E. & Lee, Gene K., 1978. "Is Leontief'S Paradox Applicable To U.S. Agricultural Trade?," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 3(02), December.
  4. George S Olley & Ariel Pakes, 1992. "The Dynamics Of Productivity In The Telecommunications Equipment Industry," Working Papers 92-2, Center for Economic Studies, U.S. Census Bureau.
  5. Pavel Ciaian & Johan Swinnen, 2005. "Land Market Imperfections and Agricultural Policy Impacts in the New EU Member States: A Partial Equilibrium Analysis," LICOS Discussion Papers 15805, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  6. Donald R. Davis & David E. Weinstein, 1998. "An Account of Global Factor Trade," NBER Working Papers 6785, National Bureau of Economic Research, Inc.
  7. Pavel Ciaian & Johan F.M. Swinnen, 2009. "Credit Market Imperfections and the Distribution of Policy Rents," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(4), pages 1124-1139.
  8. Lee, Chinkook & Wills, Darryl & Schluter, Gerald, 1988. "Examining the leontief paradox in U.S. agricultural trade," Agricultural Economics, Blackwell, vol. 2(3), pages 259-272, November.
  9. Allen, Douglas W & Lueck, Dean, 1998. "The Nature of the Farm," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 343-86, October.
  10. Yong_Seok Choi & Pravin Krishna, 2000. "The Factor Content of Bilateral Trade:an Empirical Test," Working Papers 2000-11, Brown University, Department of Economics.
  11. Pavel Ciaian & Johan F.M. Swinnen, 2007. "Credit Market Imperfections and the Distribution of Policy Rents: The Common Agricultural Policy in the New EU Member States," LICOS Discussion Papers 18307, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  12. Scott Rozelle & Johan F.M. Swinnen, 2004. "Success and Failure of Reform: Insights from the Transition of Agriculture," Journal of Economic Literature, American Economic Association, vol. 42(2), pages 404-456, June.
  13. Pollak, Robert A, 1985. "A Transaction Cost Approach to Families and Households," Journal of Economic Literature, American Economic Association, vol. 23(2), pages 581-608, June.
  14. Ciaian, Pavel & Swinnen, Johan F.M., 2006. "AJAE Appendix: Land Market Imperfections and Agricultural Policy Impacts in the New EU Member States: A Partial Equilibrium Analysis," American Journal of Agricultural Economics Appendices, Agricultural and Applied Economics Association, vol. 88(4), November.
  15. Ciaian, Pavel & Kancs, d'Artis & Pokrivcak, Jan, 2008. "Comparative Advantages, Transaction Costs and Factor Content in Agricultural Trade: Empirical Evidence from the CEE," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44135, European Association of Agricultural Economists.
  16. Lerman, Zvi, 2001. "Agriculture in transition economies: from common heritage to divergence," Agricultural Economics, Blackwell, vol. 26(2), pages 95-114, November.
  17. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December.
  18. Lai, Huiwen & Zhu, Susan Chun, 2007. "Technology, endowments, and the factor content of bilateral trade," Journal of International Economics, Elsevier, vol. 71(2), pages 389-409, April.
  19. Ciaian, Pavel & Kancs, d'Artis & Pokrivcak, Jan, 2011. "Comparative Advantages, Transaction Costs and Factor Content in Agricultural Trade: Empirical Evidence from the CEE - Vantaggi comparati, costi di transazione e contenuto dei fattori nel commercio agr," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 64(1), pages 67-101.
  20. Debeare, Peter, 2003. "Relative Factor Abundance and Trade," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 589-610, June.
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