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Home Market Effects and the Single-Sector Melitz Model

  • Gabriel J. Felbermayr
  • Benjamin Jung

Increasing-returns-to-scale imperfect competition trade models predict a more than proportionate relationship between the larger country’s share in world endowments and its share in producing firms: the so called home market effect (HME). While this result plays a key role in empirical testing, its theoretical foundation typically posits a linear, friction-free and perfectly competitive outside sector. Replacing this assumption with firm heterogeneity and Melitz (2003) type selection-into-exporting, we demonstrate the existence of a weak and a strong HME. The HMEs are generally non-linear; they are magnified by lower trade costs or more pronounced productivity dispersion. The weak version of the HME continues to hold for general sampling distributions and if the conventional sorting condition fails. In terms of demand shares, a HME holds if demand shocks are due to endowment shocks but reverses in the case of productivity shocks. Finally and in contrast to the model with an outside sector, trade liberalization leads to convergence of real per capita income.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3695.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3695
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  1. Felbermayr, Gabriel & Larch, Mario & Lechthaler, Wolfgang, 2013. "Unemployment in an interdependent world," Munich Reprints in Economics 20597, University of Munich, Department of Economics.
  2. Baldwin, Richard & Okubo, Toshihiro, 2009. "Tax reform, delocation and heterogeneous firms," CEPR Discussion Papers 7340, C.E.P.R. Discussion Papers.
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  12. Kristian Behrens & Andrea R. Lamorgese & Gianmarco I.P. Ottaviano & Takatoshi Tabuchi, 2009. "Beyond the Home Market Effect: Market Size and Specialization in a Multi-Country World," KITeS Working Papers 023, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jul 2009.
  13. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
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  15. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  16. Svetlana Demidova & Andrés Rodríguez-Clarez, 2011. "The Simple Analytics of the Melitz Model in a Small Open Economy," NBER Working Papers 17521, National Bureau of Economic Research, Inc.
  17. Demidova, Svetlana, 2005. "Productivity Improvements and Falling Trade Costs: Boon or Bane?," Working Papers 2-05-1, Pennsylvania State University, Department of Economics.
  18. Mario LARCH, . "The Home Market Effect in Models with Multinational Enterprises," EcoMod2004 330600089, EcoMod.
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