Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 86: MARKET OVERLAP AND THE DIRECTION OF EXPORTS - a new approach of assessing the Linder hypothesis

Helena Bohman () and Desirée Nilsson ()
Additional contact information
Helena Bohman: Jönköping International Business School (JIBS)
Desirée Nilsson: Jönköping International Business School (JIBS)

Abstract: The Linder hypothesis states that countries will trade more intensively with countries that have similar structures of demand. We suggest an alternative method of assessing the hypothesis, incorporating the distribution of income within a country. The variables that we develop capture the similarity in demand structures between two trading partners and the size of the market for which the market overlap is identified. These variables are included in a one-sided gravity model. Results show that similarity in structure of demand act as a catalyst of trade flows between countries and that similarities are more important for the differentiated goods than homogenous goods.

Keywords: Linder hypothesis; income distribution; overlapping demand

JEL-codes: B41; D31; F10

21 pages, March 20, 2007

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