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Gravity with History: On Incumbency Effects in International Trade

Author

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  • Egger, Peter

  • Foellmi, Reto

  • Schetter, Ulrich

  • Torun, David

Abstract

Countries trade more if they liberalized their trade relationship earlier. We derive a gravity equation featuring this path dependence due to sunk market-access costs that generate incumbency effects. We provide supporting evidence for the underlying mechanism and derive an augmented ACR formula (Arkolakis et al., 2012) for the gains from trade that accounts for incumbency effects. A quantification suggests our mechanism explains up to 25% of countries’ home shares, and the gains from trade are, on average, 10% larger when allowing for incumbency effects. The analysis further reveals novel distributional effects of trade, boosting real wages but reducing profits.

Suggested Citation

  • Egger, Peter & Foellmi, Reto & Schetter, Ulrich & Torun, David, 2024. "Gravity with History: On Incumbency Effects in International Trade," Economics Working Paper Series 2404, University of St. Gallen, School of Economics and Political Science.
    • Handle: RePEc:usg:econwp:2024:04
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    Cited by:

    1. Esteban Jaimovich & Boryana Madzharova & Vincenzo Merella, 2024. "Spreading the Good Apples Out: Market Entry Dynamics of Quality-Differentiated Products," CESifo Working Paper Series 11529, CESifo.
    2. Nicolás de Roux & Luis R. Martínez & Camilo Tovar & Jorge Tovar, 2025. "Trade Collapse and the Performance of Exporting Firms," Documentos CEDE 2025-34, Universidad de los Andes, Facultad de Economía, CEDE.
    3. Rodolfo G. Campos & Benedikt Heid & Jacopo Timini, 2024. "The economic consequences of geopolitical fragmentation: Evidence from the Cold War," Papers 2404.03508, arXiv.org.
    4. Schetter, Ulrich, 2024. "Quality differentiation, comparative advantage, and international specialization across products," European Economic Review, Elsevier, vol. 170(C).
    5. Schetter, Ulrich & Schneider, Maik T. & Jäggi, Adrian, 2024. "Inequality, openness, and growth through creative destruction," Journal of Economic Theory, Elsevier, vol. 222(C).
    6. Ridwan Ah Sheikh & Sunil Kanwar, 2024. "Revisiting the Impact of TRIPS on IPR-intensive Export Flows: Evidence from Staggered Difference-in-Differences," Working papers 351, Centre for Development Economics, Delhi School of Economics.
    7. Foellmi, Reto & Hepenstrick, Christian & Torun, David, 2024. "Triangle inequalities in international trade: The neglected dimension," Journal of International Economics, Elsevier, vol. 152(C).

    More about this item

    Keywords

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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