Working Paper: CEPR ID: DP5097
Authors: Marius Brulhart; Federico Trionfetti
Abstract: We develop a criterion to distinguish two dominant paradigms of international trade theory: constant-returns perfectly competitive models, and increasing-returns monopolistically competitive models. Our analysis makes use of the pervasive presence of home-biased expenditure. It predicts that countries? relative output and their relative home biases are positively correlated in increasing-returns sectors (the ?home-bias effect?), while no such relationship exists in constant-returns sectors. This discriminating criterion turns out to be robust to a number of generalizations of the baseline model. Our empirical results suggest that the increasing-returns model fits particularly well for the mechanical and electrical engineering industries, which account for close to half of manufacturing output.
Keywords: border effects; home-market effects; international specialization; new trade theory
JEL Codes: F10; R30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| home-biased demand (R22) | international specialization (F29) |
| home-biased demand (R22) | positive correlation between relative output and home bias (F69) |
| home bias effect (HBE) (G41) | specialization in production (L23) |
| home-biased demand (R22) | relative output in sectors with increasing returns (E23) |
| no home-biased demand (R22) | no correlation in sectors with constant returns (C10) |