American Economic Review: Vol. 94 No. 4 (September 2004)
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The Home-Market Effect and Bilateral Trade Patterns
Hanson, Gordon H., and Chong Xiang. 2004. "The Home-Market Effect and Bilateral Trade Patterns." American Economic Review, 94(4): 1108-1129.
We develop a monopolistic-competition model of trade with many industries to examine how home-market effects vary with industry characteristics. Industries with high transport costs and more differentiated products tend to be more concentrated in large countries than industries with low transport costs and less differentiated products. We test this prediction using a difference-in-difference gravity specification that controls for import tariffs, importing-country remoteness, home bias in demand, and the tendency for large countries to export more of all goods. We find strong evidence of home-market effects whose intensity varies across industries in a manner consistent with theory.
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Hanson, Gordon H.