Explaining Home Bias in Consumption: The Role of Intermediate Input Trade
Russell H. Hillberry
University of Melbourne - Department of Economics; World Bank - Development Research Group (DECRG)
David L. Hummels
Purdue University - Department of Economics; National Bureau of Economic Research (NBER)
NBER Working Paper No. w9020
We show that 'home bias' in trade patterns will arise endogenously due to the co-location decisions of intermediate and final goods producers. Our model identifies four implications of home bias arising out of specialized industrial demands. Regions absorb different bundles of goods. Buyers and sellers of intermediate goods co-locate. Intermediate input trade is highly localized. The effect of spatial frictions on trade are magnified. These implications are examined and confirmed using a unique data source that matches the detailed subnational geography of shipments to the characteristics of the shipping establishments. Our results broaden the measurement and interpretation of home bias, and provide new evidence on the role of intermediate inputs in concentrating production.
Number of Pages in PDF File: 35
Date posted: June 21, 2002
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