Gravity with History: On Incumbency Effects in International Trade

Peter Egger, Reto Foellmi, Ulrich Schetter and David Torun

No 219, Growth Lab Working Papers from Harvard's Growth Lab

Abstract: We introduce incumbency effects into a tractable dynamic model of international trade. The framework nests the canonical Melitz (2003)-Chaney (2008) model as a special case. The key novelty is that fixed costs of market access decrease with tenure. As a consequence, there is less market exit and entry in response to a shock. We derive a gravity equation and show that, ceteris paribus, countries that liberalized their trade relationship earlier trade more today. 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 quantitative analysis suggests that our mechanism can explain up to 25% of countries’ home shares and that the gains from trade are, on average, 10% larger when accounting for incumbency effects. The analysis further reveals novel distributional effects of trade that benefit real wages but reduce profits.

Keywords: incumbency effects; sunk cost of market access; gravity equation; gains from trade; home bias; path dependence (search for similar items in EconPapers)
JEL-codes: F12 F14 F15 F17 (search for similar items in EconPapers)
Date: 2023-07
New Economics Papers: this item is included in nep-int and nep-mac
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https://growthlab.hks.harvard.edu/sites/projects.i ... cumbency-effects.pdf (application/pdf)

Related works:
Working Paper: Gravity with History: On Incumbency Effects in International Trade (2024)
Working Paper: Gravity with History: On Incumbency Effects in International Trade (2023)
Working Paper: Gravity with History: On Incumbency Effects in International Trade (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:glh:wpfacu:219

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