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Trade Costs and the Home Market Effect

  • Matthieu Crozet
  • Federico Trionfetti

Most of the theoretical and empirical studies on the Home Market Effect (HME) assume the existence of an "outside good" that absorbs all trade imbalances and equalizes wages. We study the consequences on the HME of removing this assumption. The HME is attenuated and, more interestingly, it becomes non-linear. The non-linearity implies that the HME is more important for very large and very small countries than for medium size countries. The empirical investigation conducted on a database comprising 25 industries, 25 countries, and 7Â years confirms the presence of the HME and of its non-linear shape.

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Paper provided by CEPII research center in its series Working Papers with number 2007-05.

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Date of creation: Mar 2007
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Handle: RePEc:cii:cepidt:2007-05
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