Testing the ‘home market effect’ in a multi-country world

Kristian Behrens (), Andrea Lamorgese (), Gianmarco Ottaviano and Takatoshi Tabuchi

No 2005055, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

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.

Keywords: home market effect; new trade theory; multi-country models; market potential; economic geography (search for similar items in EconPapers)
JEL-codes: D58 F12 F17 R12 (search for similar items in EconPapers)
Date: 2005-09
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Citations: View citations in EconPapers (34)

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