Working Paper: CEPR ID: DP3454
Authors: Keith Head; Thierry Mayer; John Ries
Abstract: Krugman?s (1980) model of trade predicts that the country with the relatively largenumber of consumers is the net exporter and hosts a disproportionate share of firms inthe increasing returns sector. He terms these results 'home market effects'. This Paperanalyzes three additional models featuring increasing returns, firm mobility, and trade coststo assess the robustness of home market effects to alternative modeling assumptions. Wefind strikingly similar results for two of the models that relax assumptions about the natureof demand, competition, and trade costs. A model that links varieties to nationsrather than firms can, however, generate opposite results.
Keywords: Home Market Effect; Increasing Returns; Spatial Competition
JEL Codes: F12; R30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Size of the home market (number of consumers) (R22) | Trade balance (F14) |
| Market size (L25) | Share of firms (L20) |
| Market size (L25) | Net exports (F10) |
| Larger country (O57) | Less than proportionate share of firms (L25) |
| Larger country (O57) | Net importer (F10) |
| Increasing returns and firm mobility (J62) | Home market effects (F61) |
| Product differentiation and nature of competition (L13) | Existence of home market effects (F12) |