Gravity with History: On Incumbency Effects in International Trade

Peter Egger, Reto Foellmi, Ulrich Schetter and David Torun

Journal of the European Economic Association, 2025, vol. 23, issue 4, 1350-1396

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 (Arkolakis, Costinot, and Rodríguez-Clare 2012) formula 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.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:23:y:2025:i:4:p:1350-1396.

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