Working Paper: CEPR ID: DP3228
Authors: Alessandro Turrini; Tanguy Van Ypersele
Abstract: Recent evidence shows that the ?home bias puzzle? in international trade may be associated with the mere presence of national borders (McCallum (1995)). In this Paper we provide a theoretical framework to explain why borders may matter so much for trade. Our argument is that even between perfectly integrated and similar countries the legal system differs, so that legal costs are higher when business is done abroad. Using a matching model of trade, we show that the home bias is associated with both less searching foreign sellers in the home market and a lower probability of cross-border matches being accepted. In industries characterized by high turnover legal costs may reduce trade because reducing the mass of searching foreign sellers and increasing at the same time that of searching domestic sellers.
Keywords: Cross-border trade; Legal costs; Matching
JEL Codes: F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presence of national borders (F55) | increased legal costs (K41) |
| increased legal costs (K41) | higher likelihood of opportunistic behavior by buyers (L14) |
| increased legal costs (K41) | reduced probability of cross-border matches being accepted (F55) |
| reduced probability of cross-border matches being accepted (F55) | diminished overall volume of international trade (F69) |
| increased legal costs (K41) | increased home bias in trade (F14) |
| increased legal costs (K41) | deter foreign sellers (F23) |
| increased legal costs (K41) | incentivize domestic seller entry (D40) |