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Explaining Home Bias in Trade: The Role of Time Costs

Author

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  • Lee, Inkoo

    (Soongsil University)

Abstract

We study how time costs, combined with elasticity of substitution across home and foreign goods, can explain the home bias puzzle in a framework of flexible prices. Using a simple two-country model, we show that introducing time costs to an otherwise standard competitive model improves its ability to rationalize home bias in trade. Our analysis suggests that home bias and corresponding incomplete risk-sharing naturally arise in the presence of time costs, even under the assumption of complete financial markets and low elasticity of substitution between home and foreign goods.

Suggested Citation

  • Lee, Inkoo, 2010. "Explaining Home Bias in Trade: The Role of Time Costs," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 14(2), pages 3-18, December.
    • Handle: RePEc:ris:eaerev:0098
    DOI: 10.11644/KIEP.JEAI.2010.14.2.216
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    More about this item

    Keywords

    Time Costs; Home Bias; Risk Sharing; Elasticity Of Substitution;
    All these keywords.

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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