Testing the 'home market effect' in a multi-country world

Behrens, Kristian;Lamorgese, Andrea R.;Ottaviano, Gianmarco;Tabuchi, Takatoshi
(2005)

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Authors
  • Behrens, KristianUCLouvain
    Author
  • Lamorgese, Andrea R.
    Author
  • Ottaviano, Gianmarco
    Author
  • Tabuchi, Takatoshi
    Author
Abstract
We extend Krugman's (1980) two-country two-sector model to a setup with arbitrary numbers of countries and sectors. The extended model predicts an adequately defined "home market effect" only after controlling for cross-country differential accessibility through a theory-based linear filter. We bring that prediction to data by running a battery of non-parametric sign- and rank-tests that are closely related to those used in factor proportions theory. When applied to production and trade data on a cross-section of OECD and non-OECD countries, we find support for the presence of "home market effects" in a broad number of industries.
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Behrens, K., Lamorgese, A. R., Ottaviano, G., & Tabuchi, T. (2005). Testing the ‘home market effect’ in a multi-country world (CORE Discussion Papers 2005/55). https://hdl.handle.net/2078.5/128625