Gravity, Counterparties, and Foreign Investment
75 Pages Posted: 15 Mar 2018 Last revised: 28 Mar 2019
Date Written: March 25, 2019
International trade and investment flows obey gravity relationships, posing a continuing puzzle. New data on cross-border commercial real-estate investment flows show that they obey gravity, but this relationship is rendered insignificant by controlling for the presence of counterparties from origin countries in destination countries. We attribute this to a strong, robust tendency for preferential matching with same-country counterparties. We set up an equilibrium matching model with a contracting/trust friction affecting different-nationality transactions. The model explains the persistent success of gravity using the friction and the fact that the spatial distribution of same- nationality counterparties is well-explained by historical links between countries.
Keywords: Gravity, Foreign investment, Commercial real estate, Trust, Matching, Cross-border flows
JEL Classification: D83, F14, F30, G11
Suggested Citation: Suggested Citation