Esposito, Federico (2019): Demand Risk and Diversification through Trade.
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Abstract
I develop a theory of risk diversification through geography, where risk-averse entrepreneurs exploit the spatial correlation of demand across countries to lower the variance of sales. Both the probability of entry and trade flows to a market are increasing in the “Diversification Index”, which depends on the multilateral covariance of a country's demand with all other markets. The firms’ risk diversification behavior may imply higher welfare gains from trade than in standard trade models. Risk-augmented gravity regressions show that demand risk significantly affects trade patterns. The risk diversification channel increases welfare gains from trade by 16% relative to models with risk neutrality. The quantitative application highlights the role of demand uncertainty in shaping the economic consequences of the recent Chinese boom.
Item Type: | MPRA Paper |
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Original Title: | Demand Risk and Diversification through Trade |
Language: | English |
Keywords: | Demand risk; gravity; risk diversification; welfare gains from trade; China shock |
Subjects: | F - International Economics > F1 - Trade F - International Economics > F1 - Trade > F10 - General F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation F - International Economics > F6 - Economic Impacts of Globalization F - International Economics > F6 - Economic Impacts of Globalization > F60 - General |
Item ID: | 100039 |
Depositing User: | Federico Esposito |
Date Deposited: | 04 May 2020 11:30 |
Last Modified: | 04 May 2020 11:30 |
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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/100039 |
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Demand Risk and Diversification through Trade. (deposited 29 Apr 2020 07:26)
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