Trade costs and the Home Market Effect
Journal of International Economics
International trade, Test of trade theories, Economic geography, Home Market Effect
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 industries, 25 countries, and 7 years confirms the presence of the HME and of its non-linear shape.
Financially supported by ACI - Dynamiques de concentration des activités économiques dans l'espace mondial and to the Swiss National Funds.
Copyright © 2008 Elsevier B.V. All rights reserved.
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This article also published as Crozet, M. & Trionfetti, F. (2007). Trade costs and the Home Market Effect. CEPII Working Paper, (2007-05). France: CEPII. Retrieved from http://www.cepii.fr/PDF_PUB/wp/2007/wp2007-05.pdf
Crozet, M., & Trionfetti, F. (2008). Trade costs and the Home Market Effect. Journal of International Economics, 76(2), 309-321. doi: 10.1016/j.jinteco.2008.07.006