《Transaction Costs and the Pattern of International Trade 》.pdf

Transaction Costs and the Pattern of International Trade Dirk Holzhey Department of Economics University of Goettingen Platz der Goettinger Sieben 3 37073 Goettingen Preliminary Version September, 2003 Abstract Trade models featuring imperfect competition, increasing returns and transaction costs usually predict that the country with the larger home market will be the net exporter of manufacturing goods and the net im- porter of agricultural goods. This result is known as the ”home market effect”. However, virtually all these models do not care much about the specific characteristics of the transaction sector. The purpose of this pa- per is to close this gap. Based on Ottaviano et al. (2002), we introduce a separate transaction sector that features increasing returns, Cournot competition and entry barriers which are determined by regulaturoy pol- icy. Moreover, not only export sales, but also local sales involve some transaction costs. We show that the usually predicted pattern of trade disappears, if the economically small country has a sufficiently more lib- eralized transaction sector than the large country or if the economically small country is also of sufficiently small geographical size. 1 Introduction Models of imperfect competition and increasing returns reveal an important role of transaction costs, i.e. those costs involved in transferring goods (or services) from producers to consumers, in determining the pattern of trade. Krugman