Working Paper: NBER ID: w22538
Authors: Arnaud Costinot; Dave Donaldson; Margaret Kyle; Heidi Williams
Abstract: The home-market effect, first hypothesized by Linder (1961) and later formalized by Krugman (1980), is the idea that countries with larger demand for some products at home tend to have larger sales of the same products abroad. In this paper, we develop a simple test of the home-market effect using detailed drug sales data from the global pharmaceutical industry. The core of our empirical strategy is the observation that a country’s exogenous demographic composition can be used as a predictor of the diseases that its inhabitants are most likely to die from and, in turn, the drugs that they are most likely to demand. We find that the correlation between predicted home demand and sales abroad is positive and greater than the correlation between predicted home demand and purchases from abroad. In short, countries tend to be net sellers of the drugs that they demand the most, as predicted by Linder (1961) and Krugman (1980).
Keywords: Home-Market Effect; Pharmaceutical Sales; International Trade
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher domestic disease burdens (I15) | Increased sales of domestic drugs abroad (F10) |
| Increased domestic disease burdens (I12) | Greater sales of domestic drugs compared to foreign drugs (F10) |
| Increased domestic disease burdens (I12) | Increased exports of relevant drugs (F10) |
| Elasticity of sales towards foreign countries (exports) (F10) | Elasticity of purchases from foreign countries (imports) (F14) |