Testing the Home Market Effect in a Multi-Country World: The Theory

Abstract

We extend the model by Krugman (1980) to a multi-country set-up and show that the ‘home-market effect’ highlighted with two countries does not readily extend to such a general setting. In particular, we prove that the most important result, namely the disproportionate causation from demand to supply, generalizes only under the fairly implausible assumption of pairwise symmetric trade costs between all countries. We argue, therefore, that the implications of product differentiation for the structure of world trade are better characterized in terms of spatial (‘accessibility’) and non-spatial (‘attraction’) effects, and we provide a theory-based specification that suggests how to test the home market effect in such a general setting.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 39 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.