Working Paper
Bilateral Trade and Similarity of Income Distributions: The Role of Second Moments
Peter S. Eppinger, Gabriel Felbermayr
ifo Institut, München, 2014
Ifo Working Paper No. 184
ifo Institut, München, 2014
Ifo Working Paper No. 184
We use an augmented gravity model to revisit the effect of similarity in income distributions on bilateral trade flows. Disentangling supply-side and demand-side mechanisms, we document a robust new regularity: while differences in average incomes between two countries increase trade, differences in income dispersion reduce it. Our result sheds new light on the Linder hypothesis and strengthens the role of non-homothetic preferences in trade theory.
Schlagwörter: International trade, income distribution, gravity model, Linder hypothesis, nonhomothetic preferences
JEL Klassifikation: F100, D310