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Explaining Home Bias in Consumption: The Role of Intermediate Input Trade

35 Pages Posted: 21 Jun 2002 Last revised: 28 Oct 2010

Russell H. Hillberry

University of Melbourne - Department of Economics; World Bank - Development Research Group (DECRG)

David L. Hummels

Purdue University - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: June 2002

Abstract

We show that 'home bias' in trade patterns will arise endogenously due to the co-location decisions of intermediate and final goods producers. Our model identifies four implications of home bias arising out of specialized industrial demands. Regions absorb different bundles of goods. Buyers and sellers of intermediate goods co-locate. Intermediate input trade is highly localized. The effect of spatial frictions on trade are magnified. These implications are examined and confirmed using a unique data source that matches the detailed subnational geography of shipments to the characteristics of the shipping establishments. Our results broaden the measurement and interpretation of home bias, and provide new evidence on the role of intermediate inputs in concentrating production.

Suggested Citation

Hillberry, Russell H. and Hummels, David L., Explaining Home Bias in Consumption: The Role of Intermediate Input Trade (June 2002). NBER Working Paper No. w9020. Available at SSRN: https://ssrn.com/abstract=316799

Russell H. Hillberry

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

David L. Hummels (Contact Author)

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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