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Trade costs and the Home Market Effect

  • Matthieu Crozet

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)

  • Federico Trionfetti

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - EHESS - École des hautes études en sciences sociales - CNRS - AMU - Aix-Marseille Université)

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 indus- tries, 25 countries, and 7 years con¯rms the presence of the HME and of its non-linear shape.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00497693.

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Date of creation: Dec 2008
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Handle: RePEc:hal:cesptp:hal-00497693
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