Date: 2007
Type: Working Paper
Gravity and Information:Heterogeneous Firms, Exporter Networks and the ‘Distance Puzzle’
Working Paper, EUI ECO, 2007/51
KRAUTHEIM, Sebastian, Gravity and Information:Heterogeneous Firms, Exporter Networks and the ‘Distance Puzzle’, EUI ECO, 2007/51 - https://hdl.handle.net/1814/7602
Retrieved from Cadmus, EUI Research Repository
Distance effects in empirical gravity equations appear to be too high to be explained by transport costs alone. Moreover, despite the strong and ongoing reduction of transport costs, the estimated coefficients are rather increasing than decreasing over the last six decades. To address the two dimensions of this 'distance puzzle', this paper proposes a model of international trade in which heterogeneous firms create informational networks to reduce their fixed costs of exporting. Since the variable trade cost (distance) affects the number of exporters, which in turn affects the available information, the fixed cost of exporting is endogenously increasing in distance. The model thus delivers higher predictions for the level of distance effects and, in addition, a quality improvement of the networks over time implies increasing distance elasticities. Major implications of the model regarding the effects of firm heterogeneity and market structure on distance effects are supported by existing empirical evidence. An empirical gravity equation is used to estimate the effect of exporter networks on distance coefficients. In the light of the results the empirical findings on the role of distance on international trade appear considerably less puzzling.
Cadmus permanent link: https://hdl.handle.net/1814/7602
ISSN: 1725-6704
Series/Number: EUI ECO; 2007/51
Publisher: European University Institute
Keyword(s): F10 F12 D85 gravity Heterogeneous firms networks trade costs distance information