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HomeandregionalbiasesandbordereffectsinArmingtontypemodels☆
JohnWhalleya,b,c,⁎,XianXina,d
aDepartmentofEconomics,TheUniversityofWesternOntario,London,Ontario,CanadaN6A5C2bNationalBureauofEconomicResearch,(NBER),Cambridge,MA,U.S.AcTheCentreforInternationalGovernanceInnovation(CIGI,Waterloo),CanadadCollegeofEconomicsandManagement,ChinaAgriculturalUniversity,Beijing,PRChina
abstractarticleinfo
Articlehistory:Accepted31July2008
JELclassification:F10
Keywords:BordereffectHomebiasTradeWediscussbiasesinpreferencesandtheirtradeeffectsintermsofimpactsonnon-neutraltradeflowsmotivatedbyrecentliteratureonbothhomebiasandthebordereffect.Thesetermstakeonmultipledefinitionsintheliteratureandareoftenusedinterchangeablyeventhoughtheydiffer.Thebordereffectreferstoahigherproclivitytotradebehindratherthanacrossnationalbordersandisusuallydefinedbythecoefficientsofregionaldummiesfromanestimatedgravitymodel.Itcanbepresentbothindataandincounterfactualmodelsolutions.SometimesthereducedformofthegravitymodelusedisassertedtoreflectanArmingtontypemodel.Forthebordereffecttooccurasamodeloutcome,astructuralmodelwithatleast2homeregionsand1countryabroadisneeded.Incontrasttocurrentliterature,weofferacharacterizationofvariousformsofpreferencebiasintrademodelsandmeasuresoftheirassociatedtradeeffectsbasedonaconceptwetermtradeneutrality.Theseeffectsgobeyondconventionalbordereffects,andcanbebothacrossandwithinborders.HomebiasistypicallyspecifiedasanArmingtonpreferencefordomesticovercomparableforeignproductsinatrademodelwheregoodsareheterogeneousacrosscountries.Itisreflectedinbothmodelstructureandparameterization,butdefinedinseveraldifferentwaysintheliterature.Weassessthecontributionofeachformofbiastothesetofpossibletradeeffectsusingacalibratedmodelwith3Canadianregions,theU.S.,andtherestoftheworldusing2001data.Wealsoevaluatehowmuchoftheconventionalbordereffectisaccountedforwhenmodelbiasesaremodifiedinvariousways.©2008PublishedbyElsevierB.V.
1.Introduction
Thelast10yearshaveyieldedalargebodyofresearchontwo
seeminglycloselyrelatedissues:thebordereffectandhomebias.The
bordereffectisafeaturethatcanbepresenteitherinobserveddataor
acounterfactualmodelsolutionandisusuallyassociatedwith
McCallum's(1995)paperinwhichheusedthegravitymodelapplied
toboththeinternationalandinterprovincialtradeofCanadianprov-
incestoshowthatevencorrectingfordistancethereisstillalarge
effectoftheCanadianborderonCanada–UStradepatterns.Thisistrue
eveniftherearelowtariffsinbothcountries.McCallum'sobjective
wastocounterearlierclaimsintheliteraturethatduetopostwar
economicintegrationintheOECDbordershadeffectivelydisappeared
intermsoftheirimpactsonbehavior.
Multipleconstructsareusedtorepresenthomebiasbyvarious
authors(Trelfer,1995;BlonigenandWilson,1999;HeadandRies,2001;BrulhartandTrionfetti,2005;HillberryandHummels,2002).
Sometimesitisassumedtobereflectedinshareparametersthat
weightstheimportgoodrelativetothedomesticgoodinArmington
typetrademodel(BlonigenandWilson,1999);sometimesinrelative
shareparametersacrosscountryArmingtonfunctionsina2country
models(HeadandRies,2001);sometimesthroughanaddedtermin
preferenceswhichgivesutilityfromconsumptionofadomesticgood
overtotalconsumption(BrulhartandTrionfetti,2005);sometimesin
anadditionalterminlineardemands(Trelfer,1995);sometimesasa
featureofdata(HillberryandHummels,2002).
Neitherofthesetwoterms,homebiasorbordereffect,isclearlyor
uniformlydefinedintheliterature.Thesetwotermsbordereffectand
homebiasalsodonotrefertothesamething,despiteseveralplacesin
theliteraturewherethetermsareusedinterchangeably.Obstfeldand
Rogoff(2000),forinstance,refertothe“McCallumHomeBiasin
Trade”puzzleasoneofthe6leadingpuzzlesinmoderninternational
macroeconomics,1andtorecentotherliterature(Wei,1996;
Evans,EconomicModelling26(2009)309–319
☆TheauthorswouldliketothanktheEditorandanonymousreferees,JamesDavies,RandyWigle,EdgarCudmore,andYongfuChenfortheirhelpfulcommentsandsuggestions.FinancialsupportfromaCNPost-doctoralFellowshipsinTransportationPolicyheldbythesecondauthoralsomakesthispaperpossibleandisgreatlyappreciated.⁎Correspondingauthor.DepartmentofEconomics,TheUniversityofWesternOntario,London,Ontario,CanadaN6A5C2.E-mailaddresses:jwhalley@uwo.ca(J.Whalley),xinxian@cau.edu.cn(X.