Traders, Courts and the Home Bias Puzzle

29 Pages Posted: 19 Mar 2002

See all articles by Alessandro Turrini

Alessandro Turrini

European Commission; Centre for Economic Policy Research (CEPR)

Tanguy Van Ypersele

National Center for Scientific Research (CNRS) - Research Group in Quantitative Saving (GREQAM); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2002

Abstract

Recent evidence shows that the 'home bias puzzle' in international trade may be associated with the mere presence of national borders (McCallum (1995)). In this Paper we provide a theoretical framework to explain why borders may matter so much for trade. Our argument is that even between perfectly integrated and similar countries the legal system differs, so that legal costs are higher when business is done abroad. Using a matching model of trade, we show that the home bias is associated with both less searching foreign sellers in the home market and a lower probability of cross-border matches being accepted. In industries characterized by high turnover legal costs may reduce trade because reducing the mass of searching foreign sellers and increasing at the same time that of searching domestic sellers.

Keywords: Cross-border trade, legal costs, matching

JEL Classification: F12

Suggested Citation

Turrini, Alessandro and Van Ypersele, Tanguy, Traders, Courts and the Home Bias Puzzle (February 2002). CEPR Discussion Paper No. 3228. Available at SSRN: https://ssrn.com/abstract=303985

Alessandro Turrini (Contact Author)

European Commission ( email )

Office BU-10/113
B-1049 Brussels
Belgium
+32 2 299 5072 (Phone)
+32 2 299 3505 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tanguy Van Ypersele

National Center for Scientific Research (CNRS) - Research Group in Quantitative Saving (GREQAM) ( email )

Centre de la Vieille Charité
2 rue de la Charité
Marseille, 13002
France
+33 4 4293 5983 (Phone)
+33 4 4293 0968 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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