Traders, Courts and the Home Bias Puzzle

Tanguy van Ypersele and Alessandro Turrini

No 3228, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Recent evidence shows that the ?home bias puzzle? in international trade may be associated with the mere presence of national borders (McCallum (1995)). In this Paper we provide a theoretical framework to explain why borders may matter so much for trade. Our argument is that even between perfectly integrated and similar countries the legal system differs, so that legal costs are higher when business is done abroad. Using a matching model of trade, we show that the home bias is associated with both less searching foreign sellers in the home market and a lower probability of cross-border matches being accepted. In industries characterized by high turnover legal costs may reduce trade because reducing the mass of searching foreign sellers and increasing at the same time that of searching domestic sellers.

Keywords: Cros-border trade; Legal costs; Matching (search for similar items in EconPapers)
JEL-codes: F12 (search for similar items in EconPapers)
Date: 2002-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Traders, Courts, and the Home Bias Puzzle (2002)
Working Paper: Traders, Courts and the Home Bias Puzzle (2001)
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