The home-market effect and bilateral trade patterns: A reexamination of the evidence

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Abstract

This paper finds that the evidence for the home market effect (HME) found by Hanson and Xiang (AER, 2004) is sensitive to the way the dependent and the independent variables are constructed. Second, we also find that the HME evidence goes away when we estimate their difference-in-difference gravity model on a truncated sample of positive trade flows. With Eaton-Tamura-Tobit, Heckman, and Helpman-Melitz-Rubinstein estimation of the gravity equation using Hanson and Xiang's data, we are unable to find any evidence for the HME. Finally, the HME evidence is also absent for a sample of Canadian provinces' exports to U.S. states. All of our results, taken together, do not reject the existence of the HME in general but rather suggest that the HME results found by Hanson and Xiang may not be robust.

Original languageEnglish (US)
Pages (from-to)120-137
Number of pages18
JournalInternational Review of Economics and Finance
Volume30
DOIs
StatePublished - Mar 1 2014

Keywords

  • Gravity equation
  • Home-market effect
  • Zero trade flows

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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