Year: 2008
Title:
The Gravity Model and Sunk Costs: A Theoretical Analysis
JEL: F10
Authors:
ABEDINI Javad
Abstract:
Dixit (1989), Eichengreen & Irwin (1996), Anderson & Marcouiller (1999) and Das et. al. (2001) showed the determining presence of Sunk Costs in the model of bilateral trade. Using this literature, some economists have introduced the trade lagged variable in the model.
Nevertheless, in determination of the trade model, it is expected that the economic agent’s expectations are more important than the trade lagged variable. In addition, these expectations are possible to be included in the bilateral trade model by considering the presence of sunk costs.
In this paper, we develop the model of Anderson and Wincoop (2003) to a theoretical gravity model which takes into account the expected trade costs to determine the volume of bilateral trade. This new theoretical development allows the participation of the expectations in determination of the trade model. To study empirically the e¤ects of expected trade costs on the model, we also suggest a method for estimating the future growth rate of bilateral trade costs.
Moreover, our theoretical model makes it possible to justify the presence of some variables usually used in the gravity models. On the other hand, the ignorance of expectations could lead to a wrong interpretation of the coe˘ cients of these variables.
Keywords:
Gravity Model, Sunk Costs, Expectations
Contact address: Javad.Abedini at univ-nantes.fr
Paper URL: http://www.etsg.org/ETSG2005/papers/abedini.pdf
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