Gravity, Counterparties, and Foreign Investment
81 Pages Posted: 15 Mar 2018 Last revised: 20 Jul 2021
Date Written: July 16, 2021
We propose a new explanation for the persistence of gravity in international investment flows based on new facts about large cross-border commercial real-estate transactions. Buyers in these transactions preferentially match with counterparties from own or proximate countries; such affinity-based matching helps to alleviate financial investment frictions. We set up and structurally estimate a model of capital allocation in a decentralized market with an investment friction, which delivers the price, volume, and counterparty matching patterns in the data. The model shows that if clusters of high-affinity counterparties lie along historical routes, as in the data, preferential matching can perpetuate gravity relationships.
Keywords: Gravity, Foreign investment, Commercial real estate, Investment frictions, Trust, Matching, Cross-border flows
JEL Classification: D83, F14, F30, G11
Suggested Citation: Suggested Citation