Can distribution services cost explains home bias in trade?
University of New Brunswick
In this report I consider home bias in international trade. Particularly its causes and results. I refer to the earlier work in the trade literature on the relationship between terms of trade, which is the price of traded versus non-traded goods, and home bias in trade. In this report, I follow the methodology followed by Chaban (2011) and choose distribution services as a main factor that is included in terms of trade, and the national border effect that might resolve the home bias issue. The empirical results in the report illustrate that relatively high distribution costs can explain a large observed home trade bias even with low elasticity of substitution between domestically produced goods and foreign goods.