Gravity with History: On Incumbency Effects in International Trade

Peter Egger, Reto Foellmi, Ulrich Schetter and David Torun ()

No 2404, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

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 formula (Arkolakis et al., 2012) 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.

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)
Pages: 46 pages
Date: 2024-10
New Economics Papers: this item is included in nep-int
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http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-2404.pdf (application/pdf)

Related works:
Working Paper: Gravity with History: On Incumbency Effects in International Trade (2023)
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:usg:econwp:2024:04

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