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Gravity with History: On Incumbency Effects in International Trade

Author

Listed:
  • Egger, Peter
  • Foellmi, Reto
  • Schetter, Ulrich
  • Torun, David

Abstract

Countries trade more if they liberalized their trade relationship earlier. We derive a gravity equation featuring this path dependence due to sunk market-access costs that generate incumbency effects. We provide supporting evidence for the underlying mechanism and derive an augmented ACR formula (Arkolakis et al., 2012) for the gains from trade that accounts for incumbency effects. A quantification suggests our mechanism explains up to 25% of countries’ home shares, and the gains from trade are, on average, 10% larger when allowing for incumbency effects. The analysis further reveals novel distributional effects of trade, boosting real wages but reducing profits.

Suggested Citation

  • Egger, Peter & Foellmi, Reto & Schetter, Ulrich & Torun, David, 2024. "Gravity with History: On Incumbency Effects in International Trade," Economics Working Paper Series 2404, University of St. Gallen, School of Economics and Political Science.
    • Handle: RePEc:usg:econwp:2024:04
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-2404.pdf
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    More about this item

    Keywords

    incumbency effects; sunk cost of market access; gravity equation; gains from trade; home bias; path dependence;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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