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The Home-Market Effect and Bilateral Trade Patterns: A Reexamination of the Evidence

  • Cong S. Pham

    ()

  • Mary E. Lovely

    ()

  • Devashish Mitra

    ()

In this paper, we reexamine closely the empirical evidence for the home-market effect (HME) found by Hanson and Xiang (American Economic Review, 2004). We first show that evidence for the HME from their difference-in-difference gravity equation is sensitive to the way the independent variable of interest (i.e. the log of the ratio of GDPs of exporter pairs) is created. Moreover, regardless of how the sample is configured, the HME is found only in particular sub-samples of country pairs. Second, we find no evidence of the HME when we estimate the difference-in-difference gravity model on a truncated sample of positive trade flows. We also find that the magnitude of the estimated HME is sensitive to the value imputed to zero trade flows. Monte Carlo simulations show that the truncated OLS, the Eaton-Tamura Tobit and the Heckman sample-selection estimators outperform (in terms of both the bias and variation of the gravity estimates) Hanson and Xiang’s difference-in-difference estimator. Truncated OLS, ET-Tobit and Heckman estimation of the gravity equation using Hanson and Xiang’s data yield no evidence of the HME. Finally, evidence from data on exports from non-OECD countries and from Canadian provinces to the US states provides no support for the home-market effect.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2009_12.pdf
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Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2009_12.

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Length: 29 pages
Date of creation: 12 Aug 2009
Date of revision:
Handle: RePEc:dkn:econwp:eco_2009_12
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Web page: http://www.deakin.edu.au/buslaw/aef/index.php

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  1. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2007. "Estimating Trade Flows: Trading Partners and Trading Volumes," NBER Working Papers 12927, National Bureau of Economic Research, Inc.
  2. Gabriel J. Felbermayr & Wilhelm Kohler, 2007. "Does WTO Membership Make a Difference at the Extensive Margin of World Trade?," CESifo Working Paper Series 1898, CESifo Group Munich.
  3. Gabriel J. Felbermayr & Wilhelm Kohler, 2004. "Exploring the Intensive and Extensive Margins of World Trade," CESifo Working Paper Series 1276, CESifo Group Munich.
  4. Gordon H. Hanson & Chong Xiang, 2004. "The Home-Market Effect and Bilateral Trade Patterns," American Economic Review, American Economic Association, vol. 94(4), pages 1108-1129, September.
  5. Fugazza, Carolina & Giofré, Maela & Nicodano, Giovanna, 2011. "International diversification and industry-related labor income risk," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 764-783, October.
  6. 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.
  7. Zhihao Yu, 2005. "Trade, market size, and industrial structure: revisiting the home-market effect," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 255-272, February.
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  14. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  15. Kamal, Fariha & Lovely, Mary E. & Ouyang, Puman, 2012. "Does deeper integration enhance spatial advantages? Market access and wage growth in China," International Review of Economics & Finance, Elsevier, vol. 23(C), pages 59-74.
  16. Ni, Jinlan, 2009. "The effects of portfolio size on international equity home bias puzzle," International Review of Economics & Finance, Elsevier, vol. 18(3), pages 469-478, June.
  17. Keith Head & John Ries, 1998. "Immigration and Trade Creation: Econometric Evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 47-62, February.
  18. Catherine J. Morrison & Donald Siegel, 1997. "External Capital Factors And Increasing Returns In U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 647-654, November.
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