Pecking Order and Core-Periphery in International Trade
K De Bruyne,
Glenn Magerman () and
Jan Van Hove
No 2019-06, Working Papers ECARES from ULB -- Universite Libre de Bruxelles
This paper analyzes the impact of market size and trade costs on bilateral trade flows. A multi-country trade model with firm-level heterogeneity in productivities and countries’market potential provides a simple micro foundation for the link between these variables. In the model, market size and trade costs jointly determine a country-specific pecking order of exporters serving their destination countries. In a hypothetical setting where bilateral trade costs are homogeneous across country pairs, market size then implies a common ranking of exporters among destination countries. This leads to a unique core-periphery structure of the world trade network. Relaxing the assumption of homogeneous trade costs, we illustratethe impact of market size and trade costs on bilateral trade flows and its margins in a simple gravity-like setting. Using an instrumental variables approach, we find that both market size and trade costs (measured through the network position of countries) have a significant impact on bilateral exports: countries in the core bilaterally trade more with other countries in the core than with peripheral countries, conditional on typical observables.
Keywords: D85; F1; L1. (search for similar items in EconPapers)
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