Gravity, Counterparties, and Foreign Investment
74 Pages Posted: 15 Mar 2018 Last revised: 19 Nov 2018
Date Written: November 18, 2018
Gravity models excel at explaining international trade and investment flows; their success poses a continuing puzzle. In a comprehensive dataset of global investments in commercial real estate, the role of distance in the gravity model is well explained by preferential matching between counterparties (buyers and sellers) of the same nationality. This tendency is robust, and increases in poor and poorly-governed locations. We structurally estimate an equilibrium matching model with a friction that affects different-nationality counterparty transactions. The model explains the persistent success of gravity using preferential matching with same-nationality counterparties, and observed location choices of counterparties.
Keywords: Gravity, Foreign investment, Commercial real estate, Trust, Matching, Cross-border flows
JEL Classification: D83, F14, F30, G11
Suggested Citation: Suggested Citation