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Testing the ‘home market effect’ in a multi-country world

  • BEHRENS, Kristian
  • LAMORGESE, Andrea R.
  • OTTAVIANO, Gianmarco I.P.
  • TABUCHI, Takatoshi

We extend Krugman's (1980) two-country two-sector model to a setup with arbitrary numbers of countries and sectors. The extended model predicts an adequately defined "home market effect" only after controlling for cross-country differential accessibility through a theory-based linear filter. We bring that prediction to data by running a battery of non-parametric sign- and rank-tests that are closely related to those used in factor proportions theory. When applied to production and trade data on a cross-section of OECD and non-OECD countries, we find support for the presence of "home market effects" in a broad number of industries.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2005055.

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Date of creation: 00 Sep 2005
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Handle: RePEc:cor:louvco:2005055
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