Nonhomothetic Tastes and Missing Trade of Factor Services
The recent literature on the Heckscher-Ohlin-Vanek (HOV) model has concentrated on the production side, particularly the unrealistic assumptions of identical techniques and factor price equalization. However, less is known about the demand side. In this paper, we study the assumption of identical and homothetic preferences as a cause of the empirical failures in the HOV prediction. While the relaxation in identical production techniques is still crucial to predict the direction of factor trade, nonhomothetic tastes are shown to play an important role in explaining why factor trade is “missing” in the sense of Trefler (1995) relative to the HOV prediction.
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