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Gravity with History: On Incumbency Effects in International Trade

Author

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  • Peter Egger
  • Reto Foellmi
  • Ulrich Schetter
  • David Torun

Abstract

Countries trade more if they liberalized their trade relationship earlier. We derive a gravity equation featuring this path dependence due to sunk market-access costs that generate incumbency effects. We provide supporting evidence for the underlying mechanism and derive an augmented ACR (Arkolakis, Costinot, and Rodríguez-Clare 2012) formula for the gains from trade that accounts for incumbency effects. A quantification suggests our mechanism explains up to 25% of countries’ home shares, and the gains from trade are, on average, 10% larger when allowing for incumbency effects. The analysis further reveals novel distributional effects of trade, boosting real wages but reducing profits.

Suggested Citation

  • Peter Egger & Reto Foellmi & Ulrich Schetter & David Torun, 2025. "Gravity with History: On Incumbency Effects in International Trade," Journal of the European Economic Association, European Economic Association, vol. 23(4), pages 1350-1396.
    • Handle: RePEc:oup:jeurec:v:23:y:2025:i:4:p:1350-1396.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvae052
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