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Gravity, Counterparties, and Foreign Investment

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Speaker: Tarun Ramadorai - Imperial College London And CEPR
Event date: Thursday, 13 June 2019 12:30 pm - 01:45 pm
Place: JFK Building
29, Boulevard Kennedy
L-1855 Luxembourg
Ground Floor, Nancy-Metz Room

International trade and investment flows obey gravity
relationships, posing a continuing puzzle. New data on
cross-border commercial real-estate investment flows show
that they obey gravity, but this relationship is rendered
insignificant by controlling for the presence of
counterparties from origin countries in destination
countries. We attribute this to a strong, robust tendency for
preferential matching with same-country counterparties.
We set up an equilibrium matching model with a
contracting/trust friction affecting different-nationality
transactions. The model explains the persistent success of
gravity using the friction and the fact that the spatial
distribution of same- nationality counterparties is wellexplained
by historical links between countries.

Data: Invitation_T.Ramadorai_13.06.2019.pdf 299.77 kB