A Product-Quality View of the Linder Hypothesis / Juan Carlos Hallak.

Format:

Book

Author/Creator:

Hallak, Juan Carlos.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12712.

NBER working paper series no. w12712

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

The Linder hypothesis states that countries of similar income per capita should trade more intensely with one another. This hypothesis has attracted substantial research over decades, but the empirical evidence has failed to provide consistent support for it. This paper shows that the reason for the failure is the use of an inappropriate empirical benchmark, the gravity equation estimated using trade data aggregated across sectors. The paper builds a theoretical framework in which, as in Linder's theory, product quality plays the central role. A formal derivation of the Linder hypothesis is obtained, but this hypothesis is shown to hold only if it is formulated as a sector-level prediction. The "sectoral Linder hypothesis" is then estimated on a sample of 64 countries in 1995. The results support the prediction: after controlling for inter-sectoral determinants of trade, countries of similar per-capita income trade more intensely with one another. The paper also shows that a systematic aggregation bias explains the failure of the previous empirical literature to find support for Linder's theory.

Notes:

Print version record

December 2006.