Gravity, Counterparties, and Foreign Investment

64 Pages Posted: 15 Mar 2018 Last revised: 18 Sep 2018

Cristian Badarinza

National University of Singapore (NUS)

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Chihiro Shimizu

Nihon University

Date Written: September 18, 2018


Gravity models excel at explaining international trade and investment flows; their success poses a continuing puzzle. In a comprehensive dataset of cross-border transactions in high-value commercial real estate, we find that 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 large and robust, holds true for a majority of nationalities regardless of investment location, and increases in poor and poorly-governed locations. We build and structurally estimate an equilibrium search model embedding a matching friction affecting different-nationality counterparty transactions. Both liquidity and prices in the market rise substantially in the counterfactual frictionless economy. The model helps explain the persistent success of gravity using a combination of frictions generating preferential matching with counterparties of the same nationality, and the observed location choices of counterparties in the data.

Keywords: Nationality Bias, Search and Matching, Commercial Real Estate

Suggested Citation

Badarinza, Cristian and Ramadorai, Tarun and Shimizu, Chihiro, Gravity, Counterparties, and Foreign Investment (September 18, 2018). Available at SSRN: or

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom


Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Chihiro Shimizu

Nihon University ( email )

3-34-1, Shimouma
Tokyo, Tokyo 154-8513
+81-3-6453-1715 (Phone)
+81-3-6453-1630 (Fax)

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