Working Paper: NBER ID: w12712
Authors: Juan Carlos Hallak
Abstract: The Linder hypothesis states that countries of similar income per capita should trade more intensely with one another. This hypothesis has attracted substantial research over decades, but the empirical evidence has failed to provide consistent support for it. This paper shows that the reason for the failure is the use of an inappropriate empirical benchmark, the gravity equation estimated using trade data aggregated across sectors. The paper builds a theoretical framework in which, as in Linder's theory, product quality plays the central role. A formal derivation of the Linder hypothesis is obtained, but this hypothesis is shown to hold only if it is formulated as a sector-level prediction. The "sectoral Linder hypothesis" is then estimated on a sample of 64 countries in 1995. The results support the prediction: after controlling for inter-sectoral determinants of trade, countries of similar per-capita income trade more intensely with one another. The paper also shows that a systematic aggregation bias explains the failure of the previous empirical literature to find support for Linder's theory.
Keywords: Linder hypothesis; product quality; bilateral trade patterns
JEL Codes: D12; F1; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income per capita (D31) | trade intensity (F14) |
| income similarity (D31) | trade intensity (F14) |
| product quality (L15) | trade intensity (F14) |
| sector-specific determinants of trade (F19) | trade intensity (F14) |
| income per capita (D31) | product quality (L15) |
| Linder hypothesis (F16) | trade intensity (F14) |
| intersectoral determinants of trade (F19) | trade intensity (F14) |