Gravity, counterparties, and foreign investment

Cristian Badarinza, Tarun Ramadorai and Chihiro Shimizu

Journal of Financial Economics, 2022, vol. 145, issue 2, 132-152

Abstract: We propose a new explanation for the persistence of gravity in international investment flows based on new facts about large cross-border commercial real estate transactions. Buyers in these transactions preferentially match with counterparties from own or proximate countries; such affinity-based matching helps alleviate financial investment frictions. We set up and structurally estimate a model of capital allocation in a decentralized market with an investment friction, which delivers the price, volume, and counterparty matching patterns in the data. The model shows that if clusters of high-affinity counterparties lie along historical routes, as in the data, preferential matching can perpetuate gravity relationships.

Keywords: Gravity; Foreign investment; Commercial real estate; Investment frictions; Trust (search for similar items in EconPapers)
JEL-codes: D83 F14 F30 G11 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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Working Paper: Gravity, Counterparties, and Foreign Investment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:145:y:2022:i:2:p:132-152

DOI: 10.1016/j.jfineco.2021.09.011

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