Gravity, Counterparties, and Foreign Investment

Download or read book Gravity, Counterparties, and Foreign Investment written by Cristian Badarinza and published by . This book was released on 2019 with total page 75 pages. Available in PDF, EPUB and Kindle. Book excerpt: Gravity models excel at explaining international trade and investment flows; their success poses a continuing puzzle. In a comprehensive dataset of global commercial real-estate investments, we find that the role of distance in the gravity model is well-explained by preferential matching between counterparties of the same nationality. This tendency for same-country matching is widespread, robust, and increases in poorly-governed locations. We structurally estimate an equilibrium matching model with a friction affecting different-nationality transactions. The model explains the persistent success of gravity using a combination of this friction and the spatial distribution of same-nationality counterparties, which is well-predicted by current and historical linguistic, cultural, and trade links between countries.