The More We Die, the More We Sell? A Simple Test of the Home-Market Effect

47 Pages Posted: 25 Aug 2016

See all articles by Arnaud Costinot

Arnaud Costinot

Massachusetts Institute of Technology (MIT) - Department of Economics; University of California, San Diego (UCSD) - Department of Economics

Dave Donaldson

Massachusetts Institute of Technology (MIT); Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Bureau for Research and Economic Analysis of Development (BREAD)

Margaret Kyle

École Nationale Supérieure des Mines de Paris - Centre d'Économie Industrielle (CERNA)

Heidi L. Williams

MIT Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2016

Abstract

The home-market effect, first hypothesized by Linder (1961) and later formalized by Krugman (1980), is the idea that countries with larger demand for some products at home tend to have larger sales of the same products abroad. In this paper, we develop a simple test of the home-market effect using detailed drug sales data from the global pharmaceutical industry. The core of our empirical strategy is the observation that a country’s exogenous demographic composition can be used as a predictor of the diseases that its inhabitants are most likely to die from and, in turn, the drugs that they are most likely to demand. We find that the correlation between predicted home demand and sales abroad is positive and greater than the correlation between predicted home demand and purchases from abroad. In short, countries tend to be net sellers of the drugs that they demand the most, as predicted by Linder (1961) and Krugman (1980).

Suggested Citation

Costinot, Arnaud and Donaldson, Dave and Kyle, Margaret and Williams, Heidi L., The More We Die, the More We Sell? A Simple Test of the Home-Market Effect (August 2016). NBER Working Paper No. w22538, Available at SSRN: https://ssrn.com/abstract=2827456

Arnaud Costinot (Contact Author)

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Dave Donaldson

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Margaret Kyle

École Nationale Supérieure des Mines de Paris - Centre d'Économie Industrielle (CERNA) ( email )

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Heidi L. Williams

MIT Department of Economics ( email )

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