Wednesday, March 19, 2014

The Gravity of Experience

DUTT Pushan, SANTACREU Ana Maria, TRACA Daniel
Read the working paper
INSEAD Working Paper 2014/22/EPS

In this paper, we establish the importance of experience in international trade for reducing trade costs and facilitating bilateral trade. Within an augmented gravity framework, we find that an additional year of experience at the country-pair level reduces trade costs by 2.0% and increases bilateral exports by 8%. The effect of experience is stronger for country-pairs that are more distant, who do not share a common border, and who lack colonial and legal ties. Further, experience raises both the extensive and the intensive margins of trade. In a model with heterogeneous firms and where export-experience reduces trade costs, our empirical results imply that benefits of experience are shared industry-wide and that experience lowers the variable component of trade costs.