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Bilateral Trade and Similarity of Income Distributions: The Role of Second Moments

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  • Peter S. Eppinger
  • Gabriel Felbermayr
  • Gabriel J. Felbermayr

Abstract

We use an augmented gravity model to revisit the effect of similarity in income distributions on bilateral trade flows. Disentangling supply-side and demand-side mechanisms, we document a robust new regularity: while differences in average incomes between two countries increase trade, differences in income dispersion reduce it. Our result sheds new light on the Linder hypothesis and strengthens the role of non-homothetic preferences in trade theory.

Suggested Citation

  • Peter S. Eppinger & Gabriel Felbermayr & Gabriel J. Felbermayr, 2014. "Bilateral Trade and Similarity of Income Distributions: The Role of Second Moments," ifo Working Paper Series 184, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:ifowps:_184
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    References listed on IDEAS

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    2. Hendrik W. Kruse, 2020. "Revisiting the sectoral Linder hypothesis: Aggregation bias or fixed costs?," Review of International Economics, Wiley Blackwell, vol. 28(4), pages 1076-1112, September.
    3. Hendrik W. Kruse, 2016. "Revisiting the Sectoral Linder Hypothesis: Aggregation Bias or Fixed Costs?," LIS Working papers 658, LIS Cross-National Data Center in Luxembourg.
    4. Fu, Dahai & Chen, Yakun & Zhang, Ying, 2020. "Linder hypothesis revisited: Does it hold for services trade?," Economics Letters, Elsevier, vol. 195(C).
    5. Dan Liu & Christopher M. Meissner, 2017. "Geography, Income, and Trade in the 21st Century," NBER Working Papers 24121, National Bureau of Economic Research, Inc.
    6. Alexander Osharin & Valery Verbus, 2018. "Heterogeneity of consumer preferences and trade patterns in a monopolistically competitive setting," Journal of Economics, Springer, vol. 125(3), pages 211-237, November.
    7. Cícero, Vinicius Curti & Lima, Gilberto Tadeu, 2023. "Functional distribution of income as a determinant of importing behavior: An empirical analysis," Structural Change and Economic Dynamics, Elsevier, vol. 65(C), pages 393-405.
    8. Tamini, Lota D. & Chebbi, Houssem Eddine & Abbassi, Abdessalem, 2016. "Trade performance and potential of North African countries: An application of a stochastic frontier gravity model," AGRODEP working papers 33, International Food Policy Research Institute (IFPRI).
    9. Cícero, Vinicius Curti & Heras-Recuero, Laura, 2025. "The Consumption Side of Trade Shocks: Inequality Dynamics and Luxury Imports," SocArXiv 9kh2g_v1, Center for Open Science.
    10. Liu, Dan & Meissner, Christopher M., 2019. "Market potential and economic development with non-homotheticity," Journal of Development Economics, Elsevier, vol. 139(C), pages 217-228.
    11. Kitenge, Erick, 2021. "The Linder hypothesis during the globalization era," Economics Letters, Elsevier, vol. 200(C).

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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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