Gravity, Counterparties, and Foreign Investment

95 Pages Posted: 15 Mar 2018 Last revised: 18 Sep 2020

See all articles by Cristian Badarinza

Cristian Badarinza

National University of Singapore (NUS)

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Chihiro Shimizu

The University of Tokyo; Nihon University

Multiple version iconThere are 2 versions of this paper

Date Written: September 18, 2020


We propose a new explanation for the granular origins of gravity in decentralized investment markets based on newly uncovered facts from large cross-border commercial real-estate transactions. Across a wide range of countries, buyers preferentially match with counterparties from own or proximate countries. We attribute this novel finding to trust-based solutions to frictions in the legal and contractual environment in the destination market. The perpetuation of gravity can be explained using this preferential matching plus the spatial distribution of potential counterparties, which is well-explained by historical links between countries. We set up and estimate an equilibrium matching model with such a contracting/trust friction. The model provides a structural interpretation of the volume, price, and matching patterns that we see in the data.

Keywords: Gravity, Foreign investment, Commercial real estate, Trust, Matching, Cross-border flows

JEL Classification: D83, F14, F30, G11

Suggested Citation

Badarinza, Cristian and Ramadorai, Tarun and Shimizu, Chihiro, Gravity, Counterparties, and Foreign Investment (September 18, 2020). Available at SSRN: or

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) ( email )

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Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
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Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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Chihiro Shimizu

The University of Tokyo ( email )

Kashiwa, Chiba 277-8568
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277-8568 (Fax)

Nihon University ( email )

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

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