Working Paper: CEPR ID: DP13491
Authors: Tarun Ramadorai; Chihiro Shimizu
Abstract: Gravity models excel at explaining international trade and investment flows; their success poses a continuing puzzle. In a comprehensive dataset of global commercial real-estate investments, we find that the role of distance in the gravity model is well-explained by preferential matching between counterparties of the same nationality. This tendency for same-country matching is widespread, robust, and increases in poorly-governed locations. We structurally estimate an equilibrium matching model with a friction affecting different-nationality transactions. The model explains the persistent success of gravity using a combination of this friction and the spatial distribution of same-nationality counterparties, which is well-predicted by current and historical linguistic, cultural, and trade links between countries.
Keywords: gravity; foreign investment; commercial real estate; trust; matching; cross-border flows
JEL Codes: D83; F14; F30; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distance (R12) | cross-border investment flows (F21) |
| nationality bias (F52) | cross-border investment flows (F21) |
| density of same-nationality sellers (F29) | distance coefficient (R12) |
| nationality bias (F52) | transaction prices (P22) |
| friction to avoid different-nationality counterparties (F23) | expected value reduction (D46) |
| frictionless economy (D26) | transaction volumes (G15) |