World Development 129 (2020) 104863

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World Development
journal homepage: www.elsevier.com/locate/worlddev

Home-biased gravity: The role of migrant tastes in international trade

Penglong Zhang
School of Public Policy and Management, Tsinghua University, Qinghua West Road, Beijing 100084, China

a r t i c l e i n f o a b s t r a c t

Article history: Immigrants tend to buy products from their home countries. As a result, the more immigrants of a given
Accepted 24 December 2019 ethnicity a country has, the more it will tend to import from those immigrants’ countries of origin. This
Available online 8 January 2020 effect of migrant heterogeneity is ignored by the standard gravity literature that assumes homogeneous
preferences among resident consumers. This paper embeds that observed regularity into a structural
JEL classification: gravity model. Gravity derived from the Almost Ideal Demand System generates bilateral trade shares
D10 with three distinct components: ethnic composition of the resident population, bilateral trade cost,
F11
and per capita income. Using international trade and transnational migration data among 40 countries,
F14
F22
this paper estimates the home bias of each ethnic group in tastes. The results show that consumers’ tastes
for products from their country of origin deviate from unbiased levels by 35 percent on average. Ethnic
Keywords: taste bias is found to explain half of the trade bias. Counterfactuals suggest that anti-immigration policy
Home bias significantly impedes trade with immigrants’ countries of origin.
Taste bias Ó 2019 Elsevier Ltd. All rights reserved.
Migration
World
China

1. Introduction that assumes homogeneous preferences among resident national

The world is still far from flat today. Numerous studies have
found that international trade flows are too small relative to
intra-national trade to be explained by observable trade costs—
the ‘‘border puzzle” or the ‘‘home-bias-in-trade puzzle”.1 The home
expenditure shares are much larger than the levels under hypothet-
ical frictionless trades, which are equal to the countries’ production
shares.2 This implies a large home bias in trade (defined as trade bias
hereafter).
Consumers have home-biased preferences,3 and bring their
idiosyncratic preferences with them when they migrate. Thus immi-
grants tend to buy products from their home countries. This effect of
migrant heterogeneity is ignored by the standard trade literature
E-mail address: zhangpenglong@tsinghua.edu.cn.
1
The border puzzle is a widely discussed problem in macroeconomics and
international finance, first documented by McCallum (1995). Anderson and van
Wincoop (2003) develop the structural gravity model to explain the puzzle with
multilateral resistances. However, even after controlling for multilateral resistances,
there is still a border barrier that is too high to be explicable by tariffs and freight
costs (see Anderson & van Wincoop, 2004).
2 4
In a standard benchmark, if foreign products were just as accessible and desirable
as domestic ones, then under complete specialization each country would consume
its expenditure share of every other country’s production.
3
Empirical work using micro-level data provides considerable evidence. See Morey
(2016) on rice.
consumers.4 The home bias in taste (defined as taste bias hereafter)
for home goods is believed to contribute to the trade bias, but is
empirically indistinguishable from trade costs in the gravity model.
Ignoring the taste bias would lead us to overestimate the extent to
which trade liberalization can foster market integration. Failure to
account for preference heterogeneity causes problems in welfare
gains across consumers.5
This paper replaces the assumption of the representative con-
sumer with heterogeneous ethnic consumers in terms of taste bias.
Specifically, any given consumer has a taste biased toward the
goods produced by her country of origin, regardless of where she
currently resides. Thus consumers are heterogeneous in terms of
the extent of their taste biases. I extend the structural gravity
model by building and estimating a structural component of
home-biased preferences. The gravity model generates bilateral
trade shares with three distinct components: ethnic composition
of the resident population, bilateral trade cost, and per capita
income. Using international trade and migration data, this paper
estimates the taste bias of each ethnic group. The results show that
consumers’ tastes for products from their country of origin deviate
from unbiased levels significantly.
Atkin (2013) and Bronnenberg, Dubé, and Gentzkow (2012) use domestic
migration to explore the regional taste differences. Di Comite, Thisse, and
Vandenbussche (2014) propose a new model where consumer preferences are
heterogeneous across countries, but there are no migrations.
5
See Lewbel and Pendakur (2017).

https://doi.org/10.1016/j.worlddev.2019.104863
0305-750X/Ó 2019 Elsevier Ltd. All rights reserved.
2 P. Zhang / World Development 129 (2020) 104863
Similar to Atkin (2013), I define tastes for goods as pure budget
share shifters in expenditure-share equations, which measure how
much a consumer likes particular goods when qualities and prices
are exactly the same. In the Armington setup,6 a consumer with
unbiased tastes (a hypothetical metropolitan consumer) spends
her income equally on goods from different countries,7 while a con-
sumer with fully biased tastes (a hypothetical parochial consumer)
spends all her income only on home good given all else equal. Any
arbitrary consumer is then somewhere in between those two
extremes. Next, I define the taste bias of a consumer as the relative
distance between the unbiased and fully-biased tastes. The taste bias
is 0 for unbiased consumers and 1 for fully-biased consumers. In
order to distinguish taste differences from income differences acting
through non–homotheticity, I adopt the Almost Ideal Demand Sys-
tem (AIDS) constructed by Deaton and Muellbauer (1980).8
The basic assumption in this paper is that a consumer’s tastes
only depend on her country of origin, and are unrelated to where
she currently lives. Thus, consumers from the same ethnic group
share the same tastes regardless of where they are located.9 One
viable explanation of this is the habit formation in relation to tastes
proposed by Atkin (2013), who argues that adult taste favors the
foods they consumed as a child and the preferences gained in child-
hood persist into adulthood.10 Thus, immigrant consumers are
biased toward the goods from their country of origin, all else equal,
regardless of where they are located. For example, an Italian immi-
grant living in the U.K. is biased toward Italian clothing products,
and a Japanese immigrant living in the U.S. prefers Japanese elec-
tronic products, even though they left their home countries years
earlier. Note here the Japanese immigrants living in the U.S. refer
to those born in Japan or Japanese citizens, and thus are different
from the Japanese Americans who are already very assimilated. Sim-
ilar for the Italian immigrants living in the U.K. This assumption in
relation to preferences yields an aggregate demand system that is
feasible to estimate.
With the taste structure and the ethnic-preference assumption,
I derive a home-biased gravity equation by aggregating expenditure
shares across ethnic groups within each country. In addition to
trade costs and income effects, the gravity equation also captures
the impact of the trade promoter that stimulates bilateral trade
shares via immigration. The intuition is that the biased immigrants
spend larger shares of their income on products from their home
country than the native residents, thereby increasing the import
share from their home country to their host country.
The assumption that tastes only depend on origin, not on cur-
rent country, is very strong. Migrants likely choose a certain coun-
try because their tastes are more aligned with the tastes in the
destination, and thus their tastes are different from those of the
population staying in the home country. Also, immigrants assimi-
late and change their tastes in order to adapt to the dominant soci-
ety, the native people of the destination country.11 Thus I also
extend the model by adding migrant assimilation. I redefine the taste
structure. On the one hand, a consumer has a biased taste toward
6 instrument the change of immigrant share by the interaction of
Each country specializes in the production of a distinct variety.
7
I allow for asymmetric tastes for the hypothetical metropolitan consumer in both
the model and the empirical analysis. The simplification used here is just for the
purposes of the intuition discussion.
8
Recent studies have generally interpreted high income-elastic goods in the model
as high-quality goods and the low income-elastic goods as low-quality goods. Trade
papers by Hallak (2006), Fieler (2011), Caron, Fally, and Markusen (2014), Feenstra
and Romalis (2014) and Fajgelbaum and Khandelwal (2016) find that richer countries
export goods with higher income elasticities.
9
I also allow for taste differences between ethnic consumers at home and abroad
in the extension section.
10
Atkin (2013) provides ample evidence from the psychology and nutrition
literature. See Bronnenberg et al. (2012) for further discussion.
11
Some papers find immigrants change their values and norms. See Bucheli,
Fontenla, and Waddell (2019).
goods produced by her home country (where she is originally from).
On the other hand, her taste is also biased toward the goods pro-
duced locally (where she is currently living). The gravity equation
with assimilation also captures the local effect, in addition to the
taste effect, price effect, and income effect in the baseline model. It
measures the size of the relative trade ‘‘promoter” that stimulates
internal (local) trade due to the local bias in taste. This implies that
internal trade is larger than foreign trade by a local bias, all else
equal. The intuition is that the consumption pattern of the immi-
grants converges to that of the native people.
In the empirical part of the paper, I start by estimating the
home-biased gravity model without assimilation. The taste shifters
are the ethnicity-specific coefficients of immigrant stock shares.12
Using international manufacturing trade and transnational migra-
tion data among 40 countries, I find that the import share is signif-
icantly increasing in immigrant share for most ethnic groups. On
average, the taste shifter is 0.35. I also estimate sectoral gravity in
the agricultural and service sectors, and for final and intermediate
goods, as well as in multiple manufacturing industries. It is found
that consumers have larger taste biases in agricultural products,
while they are almost unbiased on services. Import share is more
sensitive to immigrant share for final goods than for intermediate
goods.
Then I check the estimation results of the home-biased gravity
with assimilation. In order to control for the assimilation effect, I
proxy the local bias with the share of the refugee population of
the destination country. Voluntary migrants usually have tastes
similar to, or converge tastes to those in the destination, while
forced migrants (e.g.. refugees) are usually less assimilated. The
results show that immigrants at the countries with larger refugee
shares are less likely to exhibit local bias (assimilation) in their
tastes. Compared with the baseline results, the taste bias estimated
with assimilation is smaller on average. Although the taste bias is
overestimated without assimilation, the differences are moderate
for most ethnic groups, implying that the baseline estimation
results are robust.
I also address two potential econometric issues. First, the esti-
mated coefficient is subject to potential endogeneity issues. I use
two instrument variables and conduct two sets of estimations
based on level and difference equations. The first instrument is
the lagged variable. I instrument the stock share of immigrants
in 2010 by that in 2000. The second instrument is an exogenous
push factor. I instrument the immigrant share by the interaction
of the natural disasters of origin and the distance to destination.
Natural disasters are measured as the average fraction of the pop-
ulation affected by natural disasters in each during decades. I start
with estimating the gravity equation in level by two-stage least
square method, and the results show that the potential endogene-
ity problem leads to an overestimation of the taste bias. However,
the effect is negligible since the differences remain within one
standard deviation. Then I further estimate the gravity equation
by taking first differences between the two cross-sections to elim-
inate any potential time-invariant omitted variables. Again I
natural disasters of origin and the distance to destination. The
result is smaller, but the difference remains moderate. Thus the
baseline results are robust.
Second, the trade-creating effect of immigration could also
work through the trade cost channel by which the migration net-
work reduces information barriers. I add a variable measuring
the network effect into the regression. It is the probability that, if
we select an individual at random from each country, they will
12
See Lanati and Thiele (2018) and Berthélemy, Beuran, and Maurel (2009). for
more details about the difference between migrant flows and migrant stocks.
 P. Zhang / World Development 129 (2020) 104863
have a connection defined as a common national origin. This mea-
sure extends the one used in Rauch and Trindade (2002) that only
captures the ethnic-Chinese network. The results show that the
network effect channel does not have a significant effect on the
aggregate manufacturing import share.
Using the estimated parameters, I conduct two counterfactual
experiments. First, I decompose the contribution of the taste effect,
trade cost effect, and income effect to the trade bias. About half of
the trade bias is explained by the trade cost, and the other half is
explained by the taste bias, with very little explained by the
income effect. Second, I check how migration policy affects trade
bias. The results show that countries decrease import shares signif-
icantly with a migration ban.
This paper contributes to the gravity literature in international
trade in two aspects. First, it introduces consumer preference
heterogeneity into gravity models, which is additional to gravity
model with firm heterogeneity (Chaney, 2008; Helpman, Melitz,
& Rubinstein, 2008), and non-homothetic gravity model with con-
sumer income heterogeneity (Fajgelbaum & Khandelwal, 2016).
Second, it allows for taste biases when discussing trade with the
AIDS preference, which is supplementary to translog gravity model
(Novy, 2013), trade that includes the entry of new goods (Feenstra,
2003), and price and income of international comparison (Neary,
2004).
My paper helps to explain the ‘‘border puzzle” using home-
biased preferences, which is supplementary to other explanations,
e.g.. trade costs (Obstfeld & Rogoff, 2001), multilateral resistance
(Anderson & van Wincoop, 2003), non-homothetic preferences
(Caron et al., 2014), multi-stage production (Yi, 2010), and scale
effects (Ramondo, Rodríguez-Clare, & Saborío-Rodríguez, 2016).
Chaney (2014) and Allen (2014) discuss resistance as a result of
information barriers. Head and Mayer (2013) summarize the
sources of resistance as imperfect information, localized tastes,
and distribution networks. It is also related to the work on border
effect based on micro evidence (Cosßar, Grieco, Li, & Tintelnot,
2018).
There is a large body of literature on the effect of international
migration on international trade. Some papers have explored the
effect of immigration on bilateral trade flows. In particular, immi-
grants are found to reduce barriers to exports by facilitating com-
munication between firms and reducing setup costs in the
destination country, which is termed the ‘‘network effect” by
Rauch and Trindade (2002). This trade cost channel of migration
on trade is also examined by Combes, Lafourcade, and Mayer
(2005), Iranzo and Peri (2009) and Felbermayr, Grossmann, and
Kohler (2015). This paper is along this line by providing a different
perspective on the preference channel.
The rest of this paper is organized as follows. In Section 2, I pre-
sent the model and derive the home-biased gravity. In Section 3, I
estimate the gravity to obtain the estimates of the taste biases and
all the other theoretical parameters. Section 4 presents the coun-
terfactual experiments. I conclude in Section 5.
2. Model
I present how to incorporate home-biased preferences into the
trade framework in Section 2.1, and derive the home-biased grav-
ity equation in Section 2.2. Section 2.3 discusses the gravity’s
implications for the home-biased trade. Section 2.4 extends the
model with more general assumptions.
2.1. Preferences
The world consists of N countries, indexed by i as exporter and n
as importer. Each country specializes in the production of a distinct
3
variety. Let pni be the price in country n of the good imported from
country i. The iceberg trade cost from i to n is t ni . No-arbitrage con-
dition implies that pni ¼ pii t ni . There are N ethnic groups of con-
sumers, indexed by h as the national origin. Each ethnic group is
globally distributed and thus each country is populated by N ethnic
groups. Note that n; i; h ¼ 1; 2; . . . ; N. Let snh be the immigrant pop-
ulation share in country n from country h if h – n, and snn be the
P
native population share in country n. Then Nh¼1 snh ¼ 1 holds for
all n.
Consumers are assumed to have the Almost Ideal Demand Sys-
tem (AIDS) preference introduced by Deaton and Muellbauer
(1980). Specifically, any consumer who is from country h and
resides at country n has expenditure functions given in logarithmic
form as
Y
N
ln ehn ¼ ln Q hn þ uhn ðpni Þ/i ; ð1Þ
i¼1
where ehn is the minimum expenditure at which the consumer can
obtain utility uhn given prices pni . The price index ln Q hn is given in
logarithmic form as
X
N
1X N X N
ln Q hn ¼ ahi ln pni þ c ln pni ln pni0 : ð2Þ
i¼1
2 i¼1 i0¼1 ii0
Applying the Shephard’s lemma and differentiating the expenditure
function with respect to log price pni generates the expenditure
share in good i for consumer h at country n equal to
!
X
N
ehn
whni ¼a þ h
i cii0 ln pni0 þ /i ln ; ð3Þ
i0¼1 Q hn
for i ¼ 1; . . . ; N. We assume that all shares are non-negative.
These expenditure shares have some nice features. First, ahi is a
taste parameter of consumer h for the good i which shifts the
expenditure share independently from the prices and income. Sec-
ond, cii0 is the cross-price elasticity for good i when i0 – i and the
own-price elasticity for good i when i0 ¼ i. Third, /i is the income
elasticity which captures the non-homothetic component of the
preference. Positive /i implies luxury goods (with high quality)
while negative /i implies necessary goods (with low quality).13 I
refer to ehn =Q hn as adjusted ‘‘real” income (expenditure) by individual
price index which varies by the individual consumption basket com-
positions. To satisfy homogeneity of degree one, the parameters are
P P
constrained by ahi 2 ½0; 1, Ni¼1 ahi ¼ 1 for all h, Ni¼1 cii0 ¼ 0 for all i0,
PN
and i¼1 /i ¼ 0. Symmetry is imposed to satisfy the Young’s Theo-
rem, cii0 ¼ ci0i . When /i ¼ 0 for all i, AIDS becomes the homothetic
translog preference.
I specialize the general cii0 to
cii0 ¼ cbi ðdii0 þ bi0 Þ; ð4Þ
where the Kronecker delta dii0 is 1 when i ¼ i0 and 0 otherwise,
P
bi 2 ½0; 1, and Ni¼1 bi ¼ 1. Specialization (4) satisfies all the general
restrictions. bi ¼ 1=N is the special case proposed by Feenstra
(2003).14 The variation of parameters bi allows for asymmetric
demand responses to price changes.
In equation (3), ahi is a taste parameter for good i but heteroge-
neous across consumers. It is unvarying to where consumers con-
sume but varies to where they are originally from. The explanation
is the habit formation in tastes proposed by Atkin (2013), who
13
Note that cii0 and /i are semi-elasticities since they relate shares to logs of prices
and income, but I refer to them as elasticities to save notation.
14
This special case is followed by Novy (2013) and Fajgelbaum and Khandelwal
(2016).
4 P. Zhang / World Development 129 (2020) 104863

argues that adults favor foods consumed as a child, and the pref- Equivalently, equation (7) could be taken as the expenditure
erences developed in childhood persist into adulthood.15 There- shares of a ‘‘representative” consumer in market n who is a
fore, consumers from the same ethnic group share the same ‘‘mixed-blood” with all ethnic origins. Since ethnic compositions
tastes regardless of where they live.16 This leads to an important differ, the representative consumers in different markets have dif-
factor in consumer tastes, home bias. For any consumer, she has ferent demand.
a biased taste toward the goods produced by her home country Next, I let X ni be the value of imports of importer n from expor-
(where she is originally from) whatever her host country (where ter i, and let En be the total expenditure of the importer. Denote wni
she resides and consumes) is. For example, an Italian immigrant as the share of aggregate expenditures in country n devoted to
living in the U.S. (born in Italy, not an Italian American) has a goods from country i, i.e.. wni ¼ XEnin . Then equation (7) could be
biased taste toward Italian products even though he has resided rewritten as
in the U.S. for years.
    
First, I assume a hypothetical world unbiased consumer with X ni p   tni
P ¼ ai  cbi ln ii þ hi sni  ai hn  cbi ln þ /i
tastes for good 1; 2; . . . ; N as fa1 ; a2 ; . . . ; aN g, and Ni¼1 ai ¼ 1. Then En 
p Pn
I assume ethnic consumer h’s tastes as
 
en
 ln  ; ð9Þ
ahi ¼ ð1  hh Þai þ hh dhi ; ð5Þ Qn
PN PN
where the Kronecker delta dhi is 1 when i ¼ h meaning home ¼
where p i¼1 bi pii and ln Pn ¼
i¼1 bi ln t ni . Income of each expor-
goods, and 0 otherwise, and hh 2 ½0; 1 is the taste shifter which P
ter i equals the sum of sales to every country, Y i ¼ Nn¼1 X ni , where
measures how biased ethnic consumer h’s taste is toward her Y i measures exporter i’s total income. Denote Y as the total world
PN h  
home good h. This specialization satisfies conditions i¼1 ai ¼ 1 income and ln r n ¼ ln en =Q  n as the real expenditure. By canceling
for all h. For any consumer h, she raises her taste for home good h  i
term ai  cbi ln ppii , I term the resulting expression as the home-
h by a shifter hh , while reduces those for all the other goods by
1  hh (as well as the home good to make sure taste aggregates biased gravity
equal to 1). When hh ¼ 0, ethnic consumer h are unbiased, exactly   r
X ni Y i   t ni n
like the hypothetical world consumer. When hh ¼ 1, the con-  ¼ hi sni  hi Psi  ai Psn  cbi ln þ /i ln ; ð10Þ
sumers from ethnic group h have fully biased tastes, i.e. 1 for
En Y Pi P n r
home good while 0 for all the others. Thus the set of taste shifters
where
fhh gNh¼1 is the measurement of the taste biases across ethnicities,
and it is the key set of parameters in this paper. Now I rewrite XN   XN  
En tni
the expenditure equations (3) as ln Pi ¼ ln t ni ; ln P n ¼ bi ln ; ð11Þ
Y Pi
  ! n¼1 i¼1
pni ehn
whni ¼ ð1  hh Þai þ hh dhi  cbi ln þ /i ln ; ð6Þ and
n
p Q hn
P XN   X
n ¼ Ni¼1 bi ln pni . And cbi
where average price in market n is ln p En N
 
Psi ¼ sni ; Psn ¼ hi sni  Psi ; ð12Þ
are the semi price elasticities and /i are the semi income n¼1
Y i¼1
elasticities.
and
2.2. Home-biased gravity
XN  
En
ln r ¼ ln r n : ð13Þ
In this part, I first aggregate individual expenditure shares Y
n¼1
across all ethnic groups within each market (country), and then
X ni
derive the gravity equation for each country pair. On the left hand side, En
 YYi is the deviation of bilateral trade
I assume that ethnic groups within a country share the same per unit of n’s expenditure from its frictionless level YYi . There are
income, i.e. ehn ¼ en . 17 Aggregating individual expenditure shares three terms on the right hand side, which capture the taste effect,
across ethnic groups gives the market import share of country n from price effect, and income effect, respectively. The second term,
P 
country i by wni ¼ Nh¼1 snh whni , i.e.. cbi ln PtniPn , is the effect of relative bilateral trade resistance,
    i
  p en where ln Pi and ln P n are the outward and inward multilateral
wni ¼ 1  hn ai þ hi sni  cbi ln ni þ /i ln  ; ð7Þ
n
p Qn resistances in log, respectively. This term is the same to that in
 
n ¼ PN snh hh , and the
where the average taste bias in market n is h
Anderson and van Wincoop (2003). The last term, /i ln rrn , is the
h¼1
non-homothetic component of the gravity equation and captures
average price index in market n by aggregating individual price
the effect of relative income per capita of market n where ln r is
index ln Q hn , the average world income per capita in log. This term is the same
X
N to that in Fajgelbaum and Khandelwal (2016).
n ¼
ln Q snh ln Q hn : ð8Þ The first term, hi sni  hi Psi  ai Psn , is one of the most important
h¼1 novelties in this paper. It captures the effect of the relative trade
‘‘promoter” that stimulates bilateral trade via bilateral migration.
The intuition is that immigrants raise the average market taste
for their home country’s products. The magnitude of the promoter
15
He terms this process habit formation and provides ample evidence in the is increasing in how large the bilateral immigrant share, sni , is, as
psychology and nutrition literature.
16
well as how large their taste shifter, hi , is. I refer to Psi and Psn
Tastes are assumed to be exogenous. Lan and Li (2015) discuss how economic
openness affects nationalism.
respectively as the outward and inward ‘‘multilateral promoters”
17
On the absence of data, I skip within-country cross-ethnicity income difference, that summarize the average trade promoters between a country
but keep cross-country income difference. and its trading partners.
 P. Zhang / World Development 129 (2020) 104863 5

2.2.1. Symmetric home-biased gravity 2.4. Extension: home bias with assimilation
The home-biased gravity expressed by equation (10) is flexible
because it allows asymmetries in ethnic groups. In order to com- Immigrants usually assimilate. In other words, migrant tastes
pare the home-biased gravity with the CES gravity in Anderson depend on origins as well as destinations. Some studies find that
and van Wincoop (2003), I impose symmetry conditions, i.e. consumers eventually converge to the consumption patterns of
hi ¼ h, ai ¼ 1=N, bi ¼ 1=N and /i ¼ 0 for all i, denote c0 ¼ c=N, then their new place of residence.19
we get the symmetric home-biased gravity In this section, I introduce ‘‘local bias” in addition to ‘‘home
  bias” into the model to allow immigrants to assimilate. I redefine
X ni Y i   tni
 ¼ h sni  Psi  Psn  c0 ln ; ð14Þ the taste parameter used in equation (3). On the one hand, a con-
En Y Pi Pn
sumer has a biased taste toward goods produced by her home
P   country (where she is originally from). On the other hand, her taste
where multilateral terms are ln Pi ¼ Nn¼1 EYn ln t ni ,
P  P   P   is also biased toward the locally-produced goods (where she is liv-
ln Pn ¼ N1 Ni¼1 ln Pt ni
, Psi ¼ Nn¼1 EYn sni , and Psn ¼ N1 Ni¼1 sni  Psi :
i ing). Specifically, I assume ethnic consumer (ethnic group) h’s
When h ¼ 0, the taste effect is shut down and the symmetric tastes at location (country) n to be
home-biased gravity is identical to the translog gravity in Novy
(2013). Recall the CES structural gravity in the log form as follows, ahni ¼ ð1  hh  Hn Þai þ hh dhi þ Hn dni ; ð17Þ
 
X ni Yi t ni where the Kronecker delta dni is 1 when i ¼ n, meaning local goods,
ln  ln ¼ Xni þ ð1  rÞ ln ; ð15Þ
En Y Pi P n and 0 otherwise, and Hn 2 ½0; 1 is the local shifter which measures
how the tastes of the consumers at location n is toward to local
 1r PN En tni 1r  1r PN Y n  tni 1r P
where Pi ¼ n¼1 Y P , and Pn ¼ i¼1 Y P : good n. This specialization still satisfies conditions Ni¼1 ahni ¼ 1 for
n i

Comparing equations (14) and (15) provides the difference in all h and all n. For any consumer h at location n, she raises her taste
the functional form on the left-hand side: a difference in shares for home good h by a shifter hh , for local good n by a shifter Hn ,
versus a difference in log shares. The own-price effect in the two while reduces those for all the other goods by 1  hh  Hn . Thus
gravity equations is essentially the same, while the cross-price the set of local shifters fHh gNh¼1 is the measurement of the local
effects are captured by price index terms that differ, but would biases across locations. Now I rewrite the expenditure
ordinarily be econometrically controlled for by origin and destina- equations (3) as
tion fixed effects. More importantly, the unobservable bilateral   !
taste effect Xni is offered a micro fundamental structure in this pni ehn
whni ¼ ð1  hh  Hn Þai þ hh dhi þ Hn dni  cbi ln þ /i ln :
paper, whereas it is taken as part of the error term in the tradi- n
p Q hn
tional gravity literature. Since the multilateral promoters are
ð18Þ
absorbed by origin and destination fixed effects, econometrically,
the difference boils down to an additional term, the immigrant Aggregating the individual expenditure shares across ethnic groups
share. The coefficient for immigrant share is exactly the taste gives the market import share of country n from country i by
shifter. P
wni ¼ Nh¼1 snh whni , i.e..
   
2.3. Home-biased trade   p en
wni ¼ 1  hn  Hn ai þ hi sni þ Hn dni  cbi ln ni þ /i ln  :
n
p Qn
Since we are interested in trade bias, I can write down the home ð19Þ
share deviation based on the home-biased gravity equation (10) as
Then the home-biased gravity with local bias becomes
X nn Y n  
HBn   r
En Y X ni Y i   t ni n
  r  ¼ hi sni  hi Psi  ai Psn  cbi ln þ /i ln
  t nn En Y Pi Pn r
¼ hn snn  hn Psn  an Psn  cbn ln þ /n ln
n
; ð16Þ  
Pn Pn r Ei
þ Hn dni  Hi ; ð20Þ
Y
where HBn is defined as country n’s home bias in trade, or trade bias,
that measures the deviation of home expenditure share from its where ln Pi , ln P n , and Psi are the same as the baseline model,
frictionless level.18 Equation (16) shows that trade bias can be while
explained by three separate effects: the taste effect, the price (trade
X X N   !
cost) effect, and the income effect. Regarding these three effects, the N
  En0
Psn ¼ hi sni  Pi þ Hn 
s
Hn0 : ð21Þ
following implications are obtained. Y
i¼1 n0¼1
Implication 1. Non-immigration countries have a larger trade bias
than immigration countries, ceteris paribus. Home countries of more On the left-hand side, X ni
 YYi is the deviation of the bilateral trade
En
biased consumers have a larger trade bias, ceteris paribus.
per unit of n’s expenditure from its frictionless level YYi . Again, the
Implication 1 holds because @HB nn
¼ hn > 0 and the intuition is
@snn first term, hi sni  hi Psi  ai P sn , captures the effect of the relative trade
that immigration countries (with smaller snn , like the U.S.) import ‘‘promoter” that stimulates bilateral trade via bilateral migration
more than non-immigration countries (with larger snn , like Japan)
from origin i to destination n. When everybody is unbiased, i.e.
since large amount of immigrants spend more on products pro-
hi ¼ 0 for all i, the trade promoters are shut down. This taste term
duced by their home countries, resulting in less domestic expendi-
is exactly the same as it is in the home-biased gravity without
ture share of the host country. The magnitude of this effect is
determined by the natives’ taste shifter for home good relative to 19
Bronnenberg et al. (2012) use micro-level data to infer that approximately 40% of
that for the global good, which are controlled by Psn and Psn . the geographic variation in market shares is attributable to persistent brand
preferences. They also show that their findings strongly reject the hypothesis that
18
In Anderson and Yotov (2010), they propose and estimate a similar index all that matters is where consumers lived in childhood: consumers who move after
^
 1r age 25 still eventually converge to the consumption patterns of their new place of
^tnn
constructed home bias (CHB) by CES structural gravity: CHBn ¼ XYnii =Y
=Y ¼
^ ^
n
. residence.
Pn Pn
6 P. Zhang / World Development 129 (2020) 104863
assimilation which is expressed by equation (10). So are the price
term and income term.
However, the home-biased gravity with assimilation has an
 P
additional term, Hn dni  Hi EYi . It captures the local effect, in addi-
tional to the taste effect, price effect, and income effect in the base-
line model. It measures the size of relative trade ‘‘promoter” that
stimulates internal (local) trade due to the local bias in taste. Spe-
cially, when i ¼ n, then dni ¼ 1, equation (20) indicates the internal
(domestic) trade for country n, in which the internal trade ‘‘pro-
moter” is Hn . When i – n, then dni ¼ 0, it indicates the foreign
trade, in which the ‘‘promoter” becomes zero. This implies that
internal trade is larger than foreign trade by a local bias, Hn , all else
equal. The intuition is that the consumption pattern of the immi-
grants converges to that of the native people. When consumers
everywhere have no local bias, i.e.. Hn ¼ 0 for all n, the internal
trade promoter is shut down, and this gravity equation corre-
sponds to that in the baseline model, i.e.. equation (10).
3. Estimation
In this section, I estimate the home-biased gravity derived in
Section 2. Section 3.1 describes the data and the specification,
and Section 3.2 presents the main results by estimating the base-
line model, i.e.. equation (10). The estimation results of the gravity
with assimilation, equation (20), are discussed in Section 3.3. I also
discuss some other econometric issues in Section 3.4.
3.1. Data
To estimate the home-biased gravity, I merged datasets on
bilateral migration, trade, and gravity. First, the migration data
are from the United Nation International Migrant Stock Dataset,
which presents estimates of total immigrant stock at mid-year by
origin and destination for the years 2000 for all countries and
regions of the world. The estimates are based on official statistics
on the foreign-born or the foreign population.20 Second, trade flows
are from the World Input-Output Database (WIOD), which records
bilateral (and domestic) trade flows and production data for 40
countries (27 European countries and 13 other large countries)
across 35 sectors that cover food, manufacturing, and services. Third,
I obtained bilateral distance, common language, border, and tariff
information from the CEPII’s Gravity database. Price levels, adjusted
for cross-country quality variations, are obtained from Feenstra and
Romalis (2014). GDP, GDP per capita, and population are from the
Penn World Tables.
Recall the home-biased gravity equation (10), where there are a
large number of parameters to estimate. Actually only the taste
shifters fhi gNi¼1 are the focus of this paper. Thus I can reduce the
number of estimated parameters by imposing some restrictions.
First, let bi ¼ 1=N for all i, which leads constant own price elasticity
following Feenstra (2003).21 Second, income elasticities and expor-
ter income are assumed to satisfy /i ¼ wc þ w ln r i for all i, similar to
Feenstra and Romalis (2014) and Fajgelbaum and Khandelwal
PN
(2016). The theoretical restriction i¼1 /i ¼ 0 implies
P Disaggregated estimation enables my results to be compared with
wc ¼ wð1=N Þ Ni¼1 ln r i , transforming this linear relationship to
P the micro-level studies on home preferences in the literature.
/i ¼ wðln r i  ln r Þ where ln r ¼ ð1=NÞ Ni0¼1 ln r i0 , and reducing the
number of income elasticity parameters to be estimated from N to
one. Recall ai is the taste of the hypothetical unbiased world con-
20
Research on immigration is often hampered by data limitations. Large-scale
individual-level surveys do not ask about immigrants’ legal status, and government
records on legal permanent residents are presented as aggregate tabulations with no
individual-level information. Caballero, Cadena, and Kovak (2018); Desmond and
Kubrin, 2009; Lyons, Vélez, and Santoro, 2013; Ravuri, 2014.
21
I allow asymmetric price elasticities in robustness check.
sumer for product i, which is equal to her expenditure share on prod-
ucts from country i in the global market. Thus we use the size of the
product set produced by country i to measure the unbiased level of
taste for good i. 22 Specifically, I proxy ai ¼ EMi = i0 EM i0 where EM i is
the extensive margin in global trade estimated by Hummels
and Klenow (2005).23 Then the home-biased gravity equation
becomes
X ni
¼ hi sni  c0 ln tni þ w ln r ni þ kn ai þ f i þ g n þ ni ; ð22Þ
En
where ln r ni ¼ ln rn  ln ri , f i ¼ Y i =Y  hi Psi þ c0 ln Pi þ w ln ri  ln r,
and g n ¼ c0 ln P n þ w ln r n  ln r þ w ln r  ln r . Here ln r i comes from
the income elasticity which is the coefficient of ln rn . I proxy bilat-
eral trade costs with bilateral observables. Specifically,
ln t ni ¼ q ln dni þ qb borderni þ ql lang ni þ qt tariffni þ qi internalni þ eni ,
where dni is the bilateral distance between origin i and destination
n. Parameter q reflects the elasticity between distance and trade
costs, borderni and lang ni are common border and common lan-
guage, tariffni is tariff level, and eni is idiosyncratic errors for trade
costs. Importantly, internalni is 0 for import and 1 for internal trade,
similar to Ramondo et al. (2016). Then the specification of the
home-biased gravity is
X ni b l t
¼ hi sni þ b ln dni þ b borderni þ b lang ni þ b tariffni
En
þ b internalni þ w ln r ni þ kn EMi þ f i þ g n þ ni :
i
ð23Þ
And f i ; g n could be controlled by fixed effects of origins and destina-
tions. There are 86 parameters to be estimated
n o
b l t i
b; b ; b ; b ; b ; w; fhi g40
i¼1 ; fki g40
i¼1 . Here fhi g40
i¼1 are the coefficients of
the interaction terms of sni and exporter dummies. And fki g40 i¼1 are
the coefficients of the interaction terms of EMi and importer dum-
mies. They are just used to control for the effects of multilateral pro-
moters. Recall the real expenditure per capita is defined as
 
 n , where en , nominal expenditures per capita, are
ln r n ¼ ln en =Q
observable too. Aggregate price index ln Q  n can be proxied by a
 
24
Stone index following literature, that is ln Q  n ¼ PN wni ln p dq ,
i¼1 ii ni
where pii are the quality-adjusted prices estimated by Feenstra and
Romalis (2014) and the value of q will be discussed later.
Because we do not directly observe trade costs, I cannot
separately identify q and cb. Following Fajgelbaum and
Khandelwal (2016) and Novy (2013), I set q ¼ 0:177. Then the
parameters of interest fhi gNi¼1 could be estimated directly and other
theoretical parameters f/i gNi¼1 and c are identified by
 P
/i ¼ w ln r i  ð1=N Þ Ni0¼1 ln ri0 , and c ¼ Nb=q.
The estimates of taste differences might be biased due to the
good composition. For example, the immigrants tend to be less
biased if their origin country is more specialized in goods that
are less tradable, or that serve as intermediate inputs and are not
directly sold to consumers. To fix this composition effect, I also
estimate sectoral (and industrial) gravity equations for 14 manu-
facturing industries, and the final and intermediate good sectors,
as well as food and service sectors using more disaggregated data.
Specifically, I estimate
22
The Armington setup assumes one differentiated good per country. The size of the
product set of each country is equivalent to the attributes of its good.
23
I replace the extensive margin with alternative measures in robustness check.
24
Deaton and Muellbauer (1980) first time use a Stone index to proxy the AIDS
price index. The trade literature, like Atkin (2013) and Fajgelbaum and Khandelwal
(2016), follow this approximation.
 P. Zhang / World Development 129 (2020) 104863 7

X kni k kb kl kt
Table 1
¼ hki sni þ b ln dni þ b borderni þ b lang ni þ b tariffni Home-biased Gravity Estimates: Baseline.
Ekn
Bilateral import share (X ni =En )
þ b internalni þ wk ln r kni þ kkn EMi þ f i þ g kn þ kni ;
ki k
ð24Þ
Distance 0.009*** (0.001)
Common border 0.023*** (0.002)
where all variables with a superscript k are defined in the same way Common language 0.014*** (0.002)
Tariff 0.008*** (0.001)
to those without any superscript but in good class k. I run the
Income 0.006*** (0.001)
regressions separately using corresponding data. Internal 0.141** (0.071)
JPN  Immigrant 0.670*** (0.075)
CHN  Immigrant 0.657*** (0.073)
3.2. Main results BRA  Immigrant 0.586*** (0.074)
USA  Immigrant 0.583*** (0.080)
IDN  Immigrant 0.576*** (0.074)
The baseline results are reported in column (1) in Table 1. The AUS  Immigrant 0.556*** (0.087)
estimates of the fixed effects are dropped since they are not the TUR  Immigrant 0.545*** (0.075)
parameters of interest. The estimate of distance elasticity is signif- IND  Immigrant 0.542*** (0.074)
icantly negative at 0.009, suggesting that distance reduces bilat- KOR  Immigrant 0.529*** (0.074)
ITA  Immigrant 0.517*** (0.076)
eral trade flows. Under the assumption that q ¼ 0:177, the
RUS  Immigrant 0.503*** (0.073)
estimate implies that c ¼ 2:03. The additional trade costs—com- ESP  Immigrant 0.495*** (0.078)
mon border, common language, tariff, internal trade—also have CAN  Immigrant 0.491*** (0.085)
the intuitive signs. The estimate of the income elasticity parameter, FIN  Immigrant 0.444*** (0.076)
IRL  Immigrant 0.437*** (0.082)
w, is significantly different from zero at 0.006. This means that peo-
FRA  Immigrant 0.425*** (0.077)
ple in richer countries are more likely to spend on products from ROM  Immigrant 0.417*** (0.074)
richer countries. GRC  Immigrant 0.393*** (0.075)
Table 1 also reports the estimates of the 40 hi parameters, one BGR  Immigrant 0.389*** (0.074)
corresponding to each ethnic group. The four ethnic groups with PRT  Immigrant 0.366*** (0.075)
SWE  Immigrant 0.341*** (0.079)
the highest h values are Japanese, Chinese, Brazilians, and Ameri-
POL  Immigrant 0.340*** (0.074)
cans. The four ethnic groups with the lowest h values are Luxem- MEX  Immigrant 0.334*** (0.074)
bourgers, Maltese, Belgians, and Dutchmen, with taste shifters TWN  Immigrant 0.333*** (0.075)
not different from 0. This indicates that the former ethnicities are LTU  Immigrant 0.327*** (0.076)
DEU  Immigrant 0.304*** (0.080)
highly home-biased consumers, whereas the latter are almost
CZE  Immigrant 0.259*** (0.075)
unbiased. On average, the taste bias measured by the ethnicity- GBR  Immigrant 0.254*** (0.078)
specific immigrant coefficients is 0.352. These results provide evi- AUT  Immigrant 0.252*** (0.081)
dence of the taste bias and estimate the magnitude of the bias for CYP  Immigrant 0.240*** (0.083)
every ethnic group. LVA  Immigrant 0.207** (0.082)
HUN  Immigrant 0.191** (0.076)
To further investigate the taste biases, I also estimate the sec-
SVK  Immigrant 0.181** (0.075)
toral gravity using equation (24) with more disaggregated data. SVN  Immigrant 0.159** (0.074)
First, I estimate the taste biases in the three sectors as shown in EST  Immigrant 0.127 (0.085)
Fig. 1 and the full results are presented in Table A.1 in the appen- DNK  Immigrant 0.116 (0.077)
NLD  Immigrant 0.107 (0.078)
dix. Compared with the manufacturing sector (the baseline esti-
BEL  Immigrant 0.049 (0.080)
mates), the agricultural sector tends to be more favored by home MLT  Immigrant 0.013 (0.079)
consumers, while the service sector is much less biased. In other LUX  Immigrant 0.156 (0.104)
words, consumers have larger taste biases (0.448 on average) in Observations 1600
relation to agricultural products, while almost unbiased (0.053 Adjusted R2 0.973
on average) on services. This makes sense based on the habit for- Mean 0.352
mation assumption that food tastes are even more persistent. Std 0.191
The taste bias is 0.257 on average when pooling all sectors. Note Notes. Table reports the estimates of the home-biased gravity equation using
that Indians are the most biased ethnic group in the agricultural bilateral manufacturing trade data. Exporter- and importer-specific fixed effects are
sector. This is consistent with what we usually observe, whereby both included. Robust standard errors in parentheses. Significance *.10, **.05, ***.01.
Indian immigrants prefer Indian food even though they are usually
highly educated and unbiased. Next, I estimate the results for three
types of goods as shown in Fig. 2 and the full results are presented
in Table A.2 in the Appendix. Import share is more sensitive to effect to some extent, but not all since disaggregation can never be
immigrant share for final goods than for intermediate goods on as fine as reality.
average.
Table 2 shows consumers’ average taste biases for various 3.3. Results with assimilation
industrial goods. They are calculated by the industry-by-industry
results (see Table A.3 and A.4 in the Appendix). Their tastes are To estimate the gravity equation (20), I follow the methodology
more biased for Textiles, Leather, transportation products, and in the baseline estimation. Note that Hi Ei =Y is captured by the
food, beverages, and tobacco, while they are less biased in non- exporter-specific fixed effects. dni is a dummy for internal trade.
metallic minerals, rubber and plastics, and electrical and optical In order to control for the assimilation effect, I proxy the local bias
equipment. The most biased ethnic groups in various industries parameters in a linear way Hn ¼ lT n for all n, where T n is a variable
are also reported. For example, Australians and Americans are that is correlated with the degree of assimilation. Three alterna-
the most biased when buying food, beverages, and tobacco, Japa- tives are provided to measure T n . The first one is a constant,
nese and Koreans are the most biased when buying transportation T n ¼ 1. This indicates that all migrants assimilate at the same
products, and Canadians are the most biased when buying wood degree across all destinations, with the coefficient l > 0. In this
products. More disaggregated estimation reduces the composition case, the assimilation effect is fully captured by the internal trade
8 P. Zhang / World Development 129 (2020) 104863

The second one is the native population share, T n ¼ snn , with

the coefficient l > 0. This is reasonable because immigrants are
more likely to assimilate in a country with a bigger native popu-
lation share in order to adapt to the dominant society. It is equal
to one minus the total immigrant population share for each
destination.
The third one is the share of the refugee population of the des-
tination country, T n ¼ Refugeen , with the coefficient l < 0. Volun-
tary migrants usually have tastes similar to, or converge tastes to
those in the destination, while forced migrants (e.g.. refugees)
are usually less assimilated. Thus the more refugees there are in
the destination country, the less assimilated the immigrants are.
The data is from UNHCR Population Statistics Database which
reports the UNHCR’s populations of concern from the year 1951
up to 2017 by location of residence, origin, and their status (refu-
gees, asylum seekers, etc.). I use the total refugee stock share in
each country until 2010.25 The three destinations with the largest
refugee population share are Malta, Sweden, and Germany, while
Fig. 1. Taste Shifters hi by Sector. Figure plots ethnicity i’s taste bias toward home
the three destinations with the smallest refugee population share
products in different sectors.
are Indonesia, Korea, and Mexico. Given the proxy of the assimilation
degree, the number of local bias parameters to be estimated is
reduced from forty to one. Thus the specification of the gravity equa-
tion (20) is

X ni b l t i
¼ hi sni þ b ln dni þ b borderni þ b lang ni þ b tariffni þ b T n
En
 internalni þ w ln r ni þ kn ai þ f i þ g n þ ni : ð25Þ

In contrast to equation (23), the dummy variable internal here inter-

acts with the proxy variable T n . The basic idea behind this interac-
tion is equivalent to capturing the variation of border barriers
across locations.
The results with the native share as a proxy are reported in col-
umn (2) in Table 3. The coefficient of the interaction term of the
internal trade and the native population share is significantly pos-
itive, which suggests that consumers located in countries with a
higher native share are more likely to exhibit local bias in their
tastes. Table 3 also reports the estimates of the 40 hi parameters,
Fig. 2. Taste Shifters hi by Good. Figure plots ethnicity i’s taste bias toward home
one for each ethnic group. After controlling for local bias in the
products for different types of goods. gravity equation, the home taste shifters estimated are mostly
smaller. On average, the taste bias measured by the ethnicity-
specific immigrant coefficients is 0.302, which is lower than the
Table 2 value of 0.352 in the baseline estimation.
Home-biased Gravity Estimates: by Industry. The results with the refugee population share as a proxy are
Industry Mean Standard Deviation reported in column (3) in Table 3. The coefficient of the interaction
term of the internal trade and the refugee share is significantly
Aggregate 0.352 0.189
Textiles 0.893 0.258 negative, which suggests that immigrants at the countries with lar-
Leather and footwear 0.783 0.349 ger refugee shares are less likely to exhibit local bias in their tastes.
Transport equipment 0.479 0.266 After controlling for local bias in the gravity equation, the home
Food, beverages, and tobacco 0.454 0.207 taste shifters estimated are mostly further smaller. On average,
Machinery 0.408 0.240
the taste bias measured by the ethnicity-specific immigrant coeffi-
Chemical products 0.375 0.276
Manufacturing, nec 0.349 0.230 cients is 0.282, which is lower than the value of 0.352 in the base-
Basic metals and fabricated metal 0.311 0.198 line estimation. Here, the three ethnic groups with the highest h
Wood products 0.222 0.191 values are Chinese, Japanese, and Americans. The three ethnic
Printing and publishing 0.196 0.180
groups with the lowest h values are Luxembourgers, Maltese, and
Electrical and optical equipment 0.192 0.214
Rubber and plastics 0.050 0.256
Belgians.
Other non-metallic minerals 0.001 0.145 Overall, compared with the baseline results, the taste bias esti-
mated with assimilation is smaller on average. Without assimila-
Notes: Table reports the estimates of home-biased gravity equation with industrial
trade flow data. Only the means and the standard deviations of the taste bias
tion, the taste bias is overestimated. But the differences are
estimates are reported. Robust standard errors in parentheses. Significance *.10, moderate for most ethnic groups, which implies that the baseline
**.05, ***.01. estimation results are robust.

dummy variable and, thus, the specification is the same as the

baseline estimation. In other words, the baseline estimates are 25
Since 2007, the refugee population also includes people in a refugee-like
equivalent to those with symmetric assimilation. situation.
 P. Zhang / World Development 129 (2020) 104863 9

Table 3
Home-biased Gravity Estimates: Assimilation.

(1) (2) (3)

Import share Import share Import share
Distance 0.009*** (0.001) 0.009*** (0.001) 0.009*** (0.001)
Border 0.023*** (0.002) 0.023*** (0.002) 0.023*** (0.002)
Language 0.014*** (0.002) 0.014*** (0.002) 0.014*** (0.002)
Tariff 0.008*** (0.001) 0.008*** (0.001) 0.008*** (0.001)
Income 0.006*** (0.001) 0.006*** (0.001) 0.006*** (0.001)
Internal 0.141** (0.071)
Internal  Native share 0.308*** (0.102)
Internal  Refugee share 0.009*** (0.003)
JPN  Immigrant 0.670*** (0.075) 0.590*** (0.076) 0.576*** (0.079)
CHN  Immigrant 0.657*** (0.073) 0.568*** (0.079) 0.588*** (0.070)
BRA  Immigrant 0.586*** (0.074) 0.498*** (0.079) 0.495*** (0.078)
USA  Immigrant 0.583*** (0.080) 0.549*** (0.065) 0.521*** (0.072)
IDN  Immigrant 0.576*** (0.074) 0.488*** (0.078) 0.467*** (0.083)
AUS  Immigrant 0.556*** (0.087) 0.587*** (0.049) 0.490*** (0.078)
TUR  Immigrant 0.545*** (0.075) 0.467*** (0.075) 0.469*** (0.073)
IND  Immigrant 0.542*** (0.074) 0.453*** (0.080) 0.470*** (0.072)
KOR  Immigrant 0.529*** (0.074) 0.448*** (0.076) 0.426*** (0.082)
ITA  Immigrant 0.517*** (0.076) 0.450*** (0.073) 0.458*** (0.068)
RUS  Immigrant 0.503*** (0.073) 0.417*** (0.077) 0.417*** (0.075)
ESP  Immigrant 0.495*** (0.078) 0.446*** (0.068) 0.410*** (0.078)
CAN  Immigrant 0.491*** (0.085) 0.505*** (0.053) 0.444*** (0.071)
FIN  Immigrant 0.444*** (0.076) 0.376*** (0.073) 0.390*** (0.067)
IRL  Immigrant 0.437*** (0.082) 0.427*** (0.059) 0.381*** (0.072)
FRA  Immigrant 0.425*** (0.077) 0.365*** (0.071) 0.378*** (0.065)
ROM  Immigrant 0.417*** (0.074) 0.329*** (0.078) 0.332*** (0.075)
GRC  Immigrant 0.393*** (0.075) 0.314*** (0.076) 0.317*** (0.073)
BGR  Immigrant 0.389*** (0.074) 0.303*** (0.078) 0.330*** (0.067)
PRT  Immigrant 0.366*** (0.075) 0.300*** (0.072) 0.276*** (0.078)
SWE  Immigrant 0.341*** (0.079) 0.299*** (0.067) 0.303*** (0.064)
POL  Immigrant 0.340*** (0.074) 0.255*** (0.077) 0.275*** (0.069)
MEX  Immigrant 0.334*** (0.074) 0.248*** (0.077) 0.236*** (0.079)
TWN  Immigrant 0.333*** (0.075) 0.258*** (0.075) 0.221*** (0.085)
LTU  Immigrant 0.327*** (0.076) 0.263*** (0.072) 0.256*** (0.073)
DEU  Immigrant 0.304*** (0.080) 0.272*** (0.065) 0.264*** (0.065)
CZE  Immigrant 0.259*** (0.075) 0.180** (0.076) 0.188*** (0.071)
GBR  Immigrant 0.254*** (0.078) 0.206*** (0.068) 0.208*** (0.066)
AUT  Immigrant 0.252*** (0.081) 0.228*** (0.062) 0.208*** (0.067)
CYP  Immigrant 0.240*** (0.083) 0.236*** (0.058) 0.192*** (0.070)
LVA  Immigrant 0.207** (0.082) 0.195*** (0.059) 0.109 (0.085)
HUN  Immigrant 0.191** (0.076) 0.125* (0.073) 0.128* (0.070)
SVK  Immigrant 0.181** (0.075) 0.109 (0.074) 0.100 (0.075)
SVN  Immigrant 0.159** (0.074) 0.076 (0.077) 0.084 (0.072)
EST  Immigrant 0.127 (0.085) 0.138** (0.054) 0.024 (0.088)
DNK  Immigrant 0.116 (0.077) 0.057 (0.071) 0.069 (0.065)
NLD  Immigrant 0.107 (0.078) 0.057 (0.069) 0.063 (0.065)
BEL  Immigrant 0.049 (0.080) 0.017 (0.064) 0.007 (0.070)
MLT  Immigrant 0.013 (0.079) 0.062 (0.069) 0.046 (0.062)
LUX  Immigrant 0.156 (0.104) 0.025 (0.025) 0.211** (0.086)
Observations 1600 1600 1600
Adjusted R2 0.973 0.973 0.973
Mean 0.352 0.302 0.282
Std 0.191 0.174 0.185

Notes. Table reports the estimates of the home-biased gravity equation after controlling for local bias. Exporter- and importer-specific fixed effects are both included. Robust
standard errors in parentheses. Significance *.10, **.05, ***.01.

3.4. Other results The results are reported in Table 4. Column (1) shows the esti-
mates of the coefficients and the estimates of fixed effects are
3.4.1. Symmetric bias dropped since they are not the parameters of interest. The estimate
To compare the estimates with those found in the extant liter- of distance elasticity is significantly negative, suggesting that bilat-
ature, I also estimate the symmetric home-biased gravity. The eral distance reduces trade flow between countries. The coeffi-
econometric specification of equation (14) is cients of the other gravity variables are also significant. The
X ni coefficient of immigrant share is estimated to be 0.405, signifi-
¼ hsni þ b ln dni þ b borderni þ b lang ni þ f i þ g n þ v ni ;
b l
ð26Þ cantly different from zero, which confirms the existence of con-
En
sumer taste bias. This result is also close to the average taste
where f i ¼ YYi  hPs þ c0 ln Pi and g n ¼ c0 ln P n  hPsi . To make the
shifter estimate of 0.352 in the baseline regression.
estimates comparable with literature, I drop the sample of domestic
I also use equation (26) to obtain estimates for a different cross-
trade shares and keep foreign trade observations only. Thus, the tar-
section, the year of 2000. The reason for this is to check that the
iff term is captured by the importer’s fixed effect,26 and the internal
results are not the artifact of a particular time period. Column (2)
trade dummy is dropped.
reports the estimates. The taste bias estimate is 0.467, which is
similar to that in 2010, confirming the robustness of the results.
26
Our measure of a country’s tariff is the average rate across all its trade partners.
10 P. Zhang / World Development 129 (2020) 104863

Table 4
Symmetric Home-biased Gravity Estimates.

(1) (2) (3) (4) (5) (6)

Share Share 2000 Share log Flow log Flow log Flow (PPML)
Immigrant share 0.405** 0.467**
(0.204) (0.205)
Distance 0.010*** 0.010*** 0.010*** 1.305*** 1.060*** 0.862***
(0.001) (0.001) (0.001) (0.045) (0.050) (0.039)
Common border 0.024*** 0.023*** 0.026*** 0.304*** 0.161 0.293***
(0.004) (0.005) (0.005) (0.118) (0.104) (0.073)
Common language 0.012*** 0.013*** 0.014*** 0.379*** 0.299** 0.217**
(0.004) (0.005) (0.004) (0.140) (0.129) (0.089)
log Immigrant stock 0.173*** 0.088***
(0.019) (0.018)
Constant 0.106*** 0.108*** 0.110*** 19.393*** 17.865*** 15.013***
(0.013) (0.014) (0.013) (0.528) (0.553) (0.429)
Observations 1560 1560 1560 1560 1560 1560
Adjusted R2 0.598 0.538 0.590 0.915 0.925

Notes: Table reports the estimates of symmetric home-biased gravity equation with manufacturing trade flow data. Exporter- and importer-specific fixed effects are both
included. Robust standard errors in parentheses. Significance *.10, **.05, ***.01.

This is consistent with my basic assumption that consumer tastes
are persistent. Column (3) tests the gravity after shutting down the
taste bias, i.e.. translog gravity, and the results are very similar to
those in Novy (2013). Together with the results as shown in col-
umn (1), they reveal that the coefficients of the traditional gravity
variables change very little regardless of whether the additional
migration variable is included. This implies that migration share
is not correlated with the traditional gravity variables, and explains
a part of the variance in trade shares that traditional gravity vari-
ables do not capture.
For sake of completeness, I also check the specifications of the
CES structural gravity in the literature. Column (4) estimates the
standard CES structural gravity. Since the dependent variable is
in log form, the estimated elasticity differs from that as shown in
the first three columns. Column (5) adds the immigrant stock in
log as an additional dependent variable which measures the level
of migration. The trade flow increases by 0.173 percent when the
immigrant population increases by 1 percent. I also check the
results by using the PPML method along the gold-standard of the
gravity literature and report the estimation in column (6). Com-
pared with the OLS estimation in column (5), both the distance
and immigrant elasticity are smaller in magnitude while the bor-
der coefficient becomes larger. Since the differences are not large,
the OLS results are robust overall.
3.4.2. Endogeneity
There are some concerns related to the estimation. The first is
that the immigrant share may be correlated with trade shocks.
When this is the case, the OLS estimation leads to inconsistent
results. Such endogeneity bias can arise from two sources. The first
is reverse causality. It is possible that a positive shock to the value
of bilateral trade between the two countries leads to more migra-
tion between them. For example, more people might migrate inter-
nationally to do business associated with more international trade.
The second is omitted variables. Migration may be correlated with
unobserved factors that also affect trade, such as the trading part-
ners’ cultural similarity or bilateral economic policies.27
To address the possible endogeneity problem, I use two instru-
mental variables and conduct two sets of estimations based on
level and difference equations. The first instrument is the lagged
variable. I instrument the share of immigrants in 2010 by that in
2000. Altonji and Card (1991) used past settlements of immigrants
as instruments for current inflows. Card (2001) suggests that his-
torical settlement patterns and the total number of newly arriving
27
There is a large literature that discusses the factors that affect international
migration. See more detailed discussion in De (2010).
immigrants from different source countries is a potential candidate
for an instrumental variable for migration.28 Previous immigrant
share is a relevant instrument, but the limitation is that the immi-
grant stock is usually quite persistent.
The second instrument is the exogenous push factor. I instru-
ment the immigrant share by the interaction of natural disasters
of origin and the distance to the destination. Llull (2018) proposes
a novel approach by using the exogenous variation obtained from
the interaction of push factors, distance, and skill cells to study the
effect of immigration on wages. Four push factors are considered in
his paper: wars, political regime changes, natural disasters, and
economic variables.29 I use natural disasters in my paper because
the other three variables might either affect or be affected by trade.
The natural disaster of the migrant-sending country is origin-
specific, and is thus captured by the origin fixed effect in the regres-
sion. Thus I interact the natural disaster with distance. It is reason-
able because the natural disaster pushes more migrants to
neighboring countries than to countries that are further away. Nat-
ural disasters, calculated from EMDAT database, are measured as
the average fraction of the population affected (needed immediate
assistance, displaced, or evacuated) by natural disasters (droughts,
earthquakes, floods, and storms) during 1950–2010. The two coun-
tries with the largest population share affected by natural disasters
are China and India (31.8% and 31.4%, respectively). I use the multi-
plicative inverse of the log distance to make the instrument posi-
tively correlated with the immigrant share, in order to consistently
compare with the first instrument, previous immigrant share, which
is also positively correlated with the endogenous variable.
I start with estimating the level equation of the gravity model,
equation (26) by two-stage least square method. The results are
reported in Table 5. Taking the previous immigrant share as the
instrument, the coefficient of immigration is 0.321 (with standard
deviation of 0.169), positively significant as shown in column (2). It
is only 0.084 less than the OLS estimate as shown in column (1).
And column (3) reports the results using natural disasters inter-
acted with distance to instrument the immigrant share. The coeffi-
cient is 0.289 (with standard deviation of 0.139), positively
significant too. It is only 0.116 less than the OLS estimate as shown
in column (1). The second-stage results show that the potential
endogeneity problem leads to an overestimation of the taste bias.
However, the effect is negligible since the differences remain
within one standard deviation.
28
See Hanson (2010) and Llull (2018) for more discussion on valid instruments for
migration.
29
Llull (2018) builds a structural model in which immigration and wage are both
endogenously determined.
 P. Zhang / World Development 129 (2020) 104863 11

Table 5 arrive from Asia, driven in large part by the arrival of Indian and Chi-
Symmetric Home-biased Gravity Estimates: Endogeneity. nese immigrants. Recall that the baseline model results (Section 3.2),
(1) (2) (3) in which taste bias is asymmetric across ethnic groups, Chinese and
Share Share Share Indians are two of the most biased consumers among the 40 groups.
Immigrant share 0.405** 0.321* 0.289** Since the coefficient of immigrant share estimated in the difference
(0.204) (0.169) (0.139) model measures the average taste bias across all new immigrants
Distance 0.010*** 0.010*** 0.010*** during 2000–2010, it turns out to be quite larger than that in the
(0.001) (0.001) (0.001)
Common border 0.024*** 0.024*** 0.023***
level model, mostly driven by Chinese and Indian immigrants, as
(0.004) (0.004) (0.004) well as those from other Asian countries.
Common language 0.012*** 0.013*** 0.014*** Although the difference model can partially solve the omitted
(0.004) (0.004) (0.004) variable problem, it cannot address the endogeneity coming from
Constant 0.106*** 0.107*** 0.104***
trade shocks that cause migration. Again I instrument the change
(0.013) (0.013) (0.012)
of immigrant share by the interaction of natural disasters and
First stage
the distance. The results are reported in column (3) in Table 6.
lagged Immigrant share (Instrument) 0.972***
(0.038) The coefficient is 0.237, positively significant. It is robust using
Natural disaster  Distance 0.128*** the gravity variables (distance, border, and language) as controls
(Instrument) as shown in column (4). The first-stage results are also reported.
(0.006) The coefficients of the instrumental variable are significantly pos-
F-stats 41.208 44.330 itive. The exclusion F-statistics are reported too. Thus both instru-
Observations 1560 1560 1560 ments are not weak. Compared with the OLS results of the
R2 0.619 0.618 0.605
difference model as shown in column (1) and (2), the coefficients
Notes: Table reports the estimates of symmetric home-biased gravity equation with of the change of the immigrant share are much smaller, implying
instrumental variables. Exporter- and importer-specific fixed effects are both the OLS estimates indeed suffer an endogeneity problem. For
included. Robust standard errors in parentheses. Significance *.10, **.05, ***.01. example, joining WTO in 2001 made both the trade share of Chi-
nese products and the population share of Chinese immigrants
I also check whether the two instruments are valid for the
grow faster. Thus the OLS method overestimates the coefficient
immigrant share in 2010. Table 5 also reports the first-stage results
due to the omitted time-varying variables. So the instrumental
corresponding to the two second-stage coefficients. They use the
variable is needed when estimating the difference model. Com-
same control-variable settings. The coefficients of both instrumen-
pared with the baseline result of 0.405 as shown in column (1) in
tal variables are significantly positive.30 The exclusion F-statistics
Table 5, the result combining both the difference model and the
are reported in Table 5. Thus both instruments are not weak.
instrumental variable is smaller, but the difference remains moder-
To further check if the baseline estimates are biased due to that
ate. Thus the baseline results are robust.
both migration and trade are influenced by time-invariant factors,
Overall, the results in this section suggest that the baseline esti-
like the mentioned cultural similarity, I also estimate the gravity
mation results are robust, although the endogeneity problem
equation by taking first differences between the two cross-
causes overestimation to some extent. The magnitude of the esti-
sections to eliminate any potential time-invariant omitted vari-
mation bias is small, and endogeneity issues are not significant
ables. More specifically, I estimate
concerns. One reason is that immigrant stock share is a state vari-
X ni able, which accumulates over a long period, while import share is a
¼ hDsni þ f i þ g 0n þ v 0ni ;
0
D ð27Þ flow variable, which is recorded annually in the dataset. Thus,
En
there is a very weak reverse causality. Moreover, different from
where D is the difference between the corresponding variable in the trade flow which is more likely to be correlated with the omit-
0
2010 and 2000, and f i (g 0n ) is the difference between origin (destina- ted variables that affect migration, trade share is much less since
tion) fixed effect in 2010 and 2000. The differences corresponding the endogenous variation in trade flow is partially offset by the
to the gravity variables (distance, border, and language) are can- total flow that is also correlated with omitted variables that affect
celed out since they are time-invariant and their coefficients remain migration. Another reason is that a large proportion of interna-
constant over time.31 tional migration is for non-economic reasons, e.g.. conflict, climate,
The results are reported in column (1) in Table 6. The migration education, religion, or economic factors but unrelated to trade, e.g..
coefficient is 0.782, which remains significantly different from job opportunities. This makes the migration more exogenous.
zero. It is robust using the gravity variables (distance, border,
and language) as controls as shown in column (2). The immigrant 3.4.3. Alternative channel
share coefficients estimated in the difference model, equation (27), The second related concern is that the coefficient of immigrant
is much larger than that in the level model, equation (26). The pos- shares may capture the effects of factors other than taste bias. The
sible reason is that the composition of the world immigrants has taste shifters may be overestimated because migration increases
changed after 2000. The population of Asian immigrants has grown trade not only through the preference channel but also through
faster than others. For example, the U.S. Asian population grew 72% the trade cost channel. As Rauch (2001) and Rauch and Trindade
between 2000 and 2015, the fastest growth rate of any major racial (2002) argue, migration builds up business, and social networks
or ethnic group.32 Although the majority of the U.S. foreign-born across national borders can help to alleviate problems related to
residents are Latin American, recent immigrants are most likely to contract enforcement and provide information about trading
opportunities. In order to check the network channel, I construct
30
Note the inverse of the distance is used, and thus the instrument is positively a new variable
correlated to the immigrant share.
31
I also keep the gravity variables in the regression for robustness checkS. See X
N

Table 6. Networkni ¼ snj sij : ð28Þ

32
The data is from the U.S. Census Bureau. See the report of the Fact Tank news
https://www.pewresearch.org/fact-tank/2017/09/08/key-facts-about-asian-ameri-
cans/https://www.pewresearch.org/fact-tank/2017/09/08/key-facts-about-asian-
americans/.
j¼1
This variable represents the probability that, if we select an individ-
ual at random from each country, they will have a connection
12 P. Zhang / World Development 129 (2020) 104863

Table 6
Symmetric Home-biased Gravity Estimates: Endogeneity (Difference Model).

(1) (2) (3) (4)

D Share D Share D Share D Share
D Immigrant share 0.782*** 0.839*** 0.237*** 0.215***
(0.214) (0.215) (0.078) (0.056)
Distance 0.000 0.002**
(0.000) (0.001)
Common border 0.002 0.007
(0.001) (0.007)
Common language 0.004*** 0.018**
(0.001) (0.007)
Constant 0.000* 0.002 0.004** 0.019**
(0.000) (0.002) (0.002) (0.008)
First stage
Natural disaster  Distance (Instrument) 0.005*** 0.006***
(0.001) (0.001)
F-stats 64.451 22.643
Observations 1560 1560 1560 1560

Notes: Table reports the estimates of symmetric home-biased gravity equation in difference with instrumental variables. Exporter- and importer-specific fixed effects are both
included. Robust standard errors in parentheses. Significance *.10, **.05, ***.01.

defined as common national origin. By construction, it is symmetric 4. Counterfactuals

for country pairs. When j ¼ CHN, it is an indirect link identical to
that in Rauch and Trindade (2002), and when j ¼ n; i, it is a summa- 4.1. Variation decomposition
tion of two direct links, similar to that in Combes et al. (2005). How-
ever, my measure extends these links to a summation of all indirect First, I examine the extent to which the trade bias can be
and both direct links, and thus captures the network effect as much explained by the taste effect, trade cost effect, and income effect,
as possible. Then, I re-specify the bilateral trade cost by adding a respectively. Recall the formula implied by home-biased gravity
new variable, Network, and rerun the regression using equation equation
(26) to control for the possible network channel.   r
The results presented in Table 7 show that the coefficients of   tnn n
HBn ¼ hn snn  hn Psn  an P sn cbn ln þ /n ln :
network is insignificant both with migration included as shown |fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl} P P
n n |fflfflfflfflfflffl
ffl r ffl}
{zfflfflfflfflfflffl
G s |fflfflfflfflfflfflfflfflfflfflfflfflffl
ffl {zfflfflfflfflfflfflfflfflfflfflfflfflffl
ffl }
in column (2), and without migration as shown in (4). Column n
Gtn Gin
(3) and (5) show the results when emigration share is added, but
this coefficient is not significant either. This is straightforward, Specifically, I term the taste effect, trade cost effect, and income
because emigrants contribute to the bilateral network, but not to effect as Gsn , Gtn , and Gin respectively. Then I calculate the contribu-
the preference effect. Column (6) checks the network effect in tion of each effect to the trade bias of each country by
CES gravity. The coefficient of network is 13.504, which is signifi- l
Contributionn ¼ Gln =HBn where l ¼ s; t; i. Column (1) in Table 8 lists
cantly positive, consistent with the findings of Rauch and
the trade biases for 40 countries, which are the deviations of the
Trindade (2002), which implies that my measure of the network
home shares from their frictionless levels in the manufacturing sec-
effect is valid. All of this evidence indicates that the network chan-
tor. The average bias is 54%. Columns (2)-(4) report the percentage
nel has negligible effect on the import share of aggregate manufac-
contributions of the three effects on trade bias. On average, 43.2% of
turing products. Moreover, different to trade flow which is more
the market trade bias is explained by the trade cost, 56.3% by the
likely to be affected by network, trade share is much less since
home-biased taste, only 0.5% by the income effect. In other words,
the network effect in trade flow is partially offset by the total flows
the trade cost and the home-biased taste are the main causes of
that is also affected by network effect.
the trade bias, while the income effect is negligible. Head and

Table 7
Symmetric Home-biased Gravity Estimates: Network Effect.

(1) (2) (3) (4) (5) (6)

Share Share Share Share Share log Flow
Immigrant share 0.405** 0.604** 0.398**
(0.204) (0.242) (0.202)
Distance 0.010*** 0.010*** 0.010*** 0.010*** 0.010*** 1.291***
(0.001) (0.001) (0.001) (0.001) (0.001) (0.045)
Common border 0.024*** 0.025*** 0.025*** 0.025*** 0.027*** 0.147
(0.004) (0.005) (0.005) (0.005) (0.005) (0.120)
Common language 0.012*** 0.013*** 0.013*** 0.013*** 0.014*** 0.296**
(0.004) (0.004) (0.004) (0.004) (0.005) (0.134)
Network 0.212 0.097 13.504***
(0.136) (0.096) (2.761)
Emigrant share 0.192 0.207
(0.130) (0.134)
Constant 0.106*** 0.108*** 0.108*** 0.108*** 0.111*** 19.160***
(0.013) (0.013) (0.013) (0.013) (0.013) (0.529)
Observations 1560 1560 1560 1560 1560 1560
Adjusted R2 0.598 0.599 0.599 0.591 0.592 0.916

Notes: Table reports the estimates of symmetric home-biased gravity equation with the migration network effect controlled. Exporter- and importer-specific fixed effects are
both included. Robust standard errors in parentheses. Significance *.10, **.05, ***.01.
 P. Zhang / World Development 129 (2020) 104863 13

Mayer (2013) show that between 50% and 85% of the distance effect
on trade flows are the result of the indirect trade costs (that they
term as ‘‘dark trade costs”). Cosßar et al. (2018) estimate the home
bias in the automobile market and conclude that about 2/3 of the
reduced form home bias is due to the taste effect. Compared with
those findings, my results showing that the contribution of the taste
effect is 56.3% is reasonable and consistent.
4.2. Policy implications
In this subsection, I discuss how migration policy affects the
trade bias using the parameter values estimated in the baseline
regression. If the bilateral immigrant share snn changes, it has a
direct effect on the corresponding trade bias HBn . However, the
change in snn also has an indirect effect on trade bias through a
change in multilateral promoters. Specifically,
DHBn ¼ hn Dsnn hn DPsn  an DP sn
|fflfflffl{zfflfflffl} |fflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl}
direct effect indirect effect
The taste bias hn only captures the direct effect of a change in snn on
HBn . The indirect effect is captured by the multilateral promoters
hn DPsn and an DP sn .
Consider an extreme migration policy, such as a ban on migra-
tion, for country n, in an effort to raise the native population share
to 1. How does the country’s trade bias respond to this shock?
Using the equation above, I calculate the percentage change in
trade bias DHBn =HBn for each country. The results are reported in
column (2) in Table 9. The increase in trade bias is small, only
3.7% on average. However, the increase is much greater for immi-
grant countries, with Australia’s trade bias increasing by 12.8% and
that of Canada increasing by 10.5%. A ban on immigration in the U.
S. would increase the intra-national trade by 6.6%.
Note that the net change of the home market share due to the
migration ban is not necessarily positive. For example, in Table 9,
the home share of China decreases by 26.6% if all foreign immigrants
leave and all Chinese emigrants return. The intuition is that the mul-
tilateral promoter (Psn ) increases much more than the bilateral pro-
moter (snn , more precisely internal promoter since n ¼ i). China has
a very small immigrant population, and, thus, the migration ban
raises the native population share very little. But a large amount
of Chinese emigrants return and consume at home without paying
ð29Þ
trade costs for Chinese products any more. This increases the global
demand for Chinese products, and then the price of Chinese prod-
ucts relative to that of the foreign product (partially captured by
Psn ) goes up. This term of trade effect makes Chinese consumers
spend smaller expenditure shares on the home products. This also
happens for some other countries sending a large amount of
migrants globally, e.g.. India and Japan as shown in Table 9.

Table 8 Table 9
Counterfactuals: Contribution Decomposition. Counterfactuals: Migration Policy Implications.

Share Contribution of (%) Shares % D shares with

Trade bias Trade cost Taste Income Country Trade Bias Zero migration Full migration
Brazil 86.3 34.5 65.2 0.3 Brazil 86.3 0.6 66.1
India 84.1 35.9 62.1 2.1 India 84.1 0.6 62.8
Indonesia 81.5 29.7 69.4 1.0 Indonesia 81.5 0.9 68.7
Japan 79.7 25.6 74.3 0.1 Japan 79.7 5.0 80.7
Korea 77.1 34.7 65.2 0.1 Korea 77.1 0.2 66.0
Turkey 75.5 30.2 69.8 0.1 Turkey 75.5 2.1 69.0
Russia 74.2 34.0 66.0 0.0 Russia 74.2 0.4 65.9
Australia 70.4 33.6 66.2 0.2 Australia 70.4 12.8 65.1
Italy 68.5 29.4 70.4 0.1 Italy 68.5 2.0 71.0
Spain 65.3 29.9 70.1 0.1 Spain 65.3 4.9 69.5
China 62.9 24.9 74.3 0.8 China 62.9 26.6 101.9
Finland 62.8 31.5 68.3 0.2 Finland 62.8 4.2 66.5
Canada 62.4 33.3 66.5 0.2 Canada 62.4 10.5 66.2
United States 61.3 26.8 72.9 0.4 United States 61.3 6.3 85.4
Romania 60.9 31.6 68.3 0.1 Romania 60.9 2.3 66.4
Ireland 59.1 33.5 66.1 0.4 Ireland 59.1 9.9 64.3
Greece 58.6 33.8 66.2 0.0 Greece 58.6 3.2 64.2
France 58.6 32.2 67.6 0.2 France 58.6 2.7 67.7
Bulgaria 58.5 33.4 66.5 0.1 Bulgaria 58.5 2.7 64.4
Taiwan 58.4 43.6 56.1 0.3 Taiwan 58.4 3.0 54.5
Mexico 58.2 42.9 56.8 0.3 Mexico 58.2 1.7 55.6
Portugal 56.1 36.7 63.3 0.0 Portugal 56.1 4.5 61.3
Poland 53.5 36.6 63.4 0.0 Poland 53.5 2.5 61.4
Sweden 51.8 37.9 61.8 0.3 Sweden 51.8 6.6 59.7
Lithuania 51.6 38.6 61.4 0.0 Lithuania 51.6 5.0 59.3
Germany 49.3 44.3 55.4 0.3 Germany 49.3 4.4 55.3
Czech 45.0 42.5 57.5 0.0 Czech 45.0 3.7 55.1
United Kingdom 43.8 44.4 55.3 0.2 United Kingdom 43.8 5.2 53.2
Cyprus 42.9 49.8 50.0 0.2 Cyprus 42.9 9.6 48.2
Austria 42.2 44.0 55.5 0.5 Austria 42.2 8.3 52.9
Latvia 39.6 52.2 47.7 0.0 Latvia 39.6 9.0 45.4
Hungary 38.5 50.3 49.7 0.0 Hungary 38.5 5.1 46.8
Slovakia 37.2 51.2 48.8 0.0 Slovakia 37.2 4.9 46.1
Slovenia 35.7 55.0 45.0 0.0 Slovenia 35.7 4.3 42.8
Estonia 32.1 64.8 35.2 0.0 Estonia 32.1 9.7 33.0
Denmark 31.9 62.7 36.7 0.6 Denmark 31.9 5.9 33.7
Netherlands 31.8 64.7 34.5 0.8 Netherlands 31.8 6.1 30.7
Belgium 25.4 77.7 21.5 0.7 Belgium 25.4 7.0 17.1
Malta 20.9 99.7 0.2 0.1 Malta 20.9 6.8 0.3
Luxembourg 10.3 89.6 0.9 9.5 Luxembourg 10.3 15.5 2.4
Mean 54.1 43.2 56.3 0.5 Mean 54.1 3.7 56.0
St.d. 18.0 16.9 17.6 1.5 St.d. 18.0 6.5 20.1

Notes: Table reports the contribution decomposition of the home bias in trade. Notes: Table reports the policy implications of the home-biased gravity.
14 P. Zhang / World Development 129 (2020) 104863

Conversely, if we removed all migration barriers for country n
and allow consumers to freely migrate across its borders, country
n would eventually have exactly the same ethnic composition as
the world population. The results are shown in column (3) in Table 9.
The trade bias decreases by 56% on average, which is much greater
than the increase in the case of the migration ban. China’s trade
biases will decline the most because China has a very small immi-
grant population and Chinese consumers are highly biased in taste.
whether the taste biases differ within ethnic groups. Second, differ-
ent generations of migrants would enable us to check whether
taste bias decays over time. More challenging and perhaps beyond
the scope of the present model, is identifying the deep underlying
causes of taste bias formation. These are all promising directions
for future research.
Declaration of Competing Interest

The authors declare that they have no known competing finan-

5. Conclusion
Trade models usually assume identical preferences across con-
sumers. Differences in demand across countries, such as home-
biased tastes, are often included in unobservable ‘‘trade costs,”
which are indistinguishable. Thus, it is important to quantitatively
assess the two because declines in trade costs and the homogeniza-
tion of tastes have different implications for trade policies and wel-
fare changes. This paper provides a structural component of home-
biased preferences that is feasible to estimate. Bilateral market
tastes are determined by combining bilateral migration and
migrants’ taste bias. I estimate taste bias for each ethnic group and
find that taste bias explains more of the trade bias than trade costs.
The home-biased gravity model suggests several extensions.
First, endogenous migration can be included in the model to derive
more policy implications. Second, another potential extension is to
allow for within-country income differences to further investigate
variations in taste biases. Empirically, there are some other possi-
ble extensions. First, more information on immigrants, such as
their level of education, age, and religion could be included to test
cial interests or personal relationships that could have appeared
to influence the work reported in this paper.
Acknowledgement
I would also like to thank the editor, two anonymous referees,
James Anderson, Pol Antrás, David Atkin, Susanto Basu, Pablo
Fajgelbaum, Yushan Hu, Amit Khandelwal, Arthur Lewbel, Ben Li,
James Rauch, Roberto Rigobon, Fabio Schiantarelli, Felix Tintelnot,
Zhijie Xiao, Juanjuan Zhang and the seminar participants at Boston
College, MIT Sloan School of Management, Tsinghua University, the
meetings of the Midwest International Economics Group, as well as
the European Trade Study Group. All errors are mine. This research
did not receive any specific grant from funding agencies in the
public, commercial, or not-for-profit sectors.
Appendix A. Appendix to tables
Tables A.1–A.4.

Table A.1
Home-biased Gravity Estimates: by Sector.

(1) (2) (3) (4)

Manufacturing (Baseline) Agricultural Service Total
Distance 0.009*** (0.001) 0.005*** (0.001) 0.001*** (0.000) 0.001*** (0.000)
Border 0.023*** (0.002) 0.022*** (0.003) 0.001 (0.001) 0.010*** (0.001)
Language 0.014*** (0.002) 0.010*** (0.003) 0.002** (0.001) 0.005*** (0.001)
Tariff 0.008*** (0.001) 0.000 (0.000) 0.006 (0.007) 0.000 (0.000)
Income 0.006*** (0.001) 0.001** (0.000) 0.002*** (0.000) 0.000*** (0.000)
Internal 0.141** (0.071) 0.253** (0.104) 0.807*** (0.080) 0.556*** (0.039)
JPN  Immigrant 0.670*** (0.075) 0.409*** (0.109) 0.094** (0.037) 0.382*** (0.041)
CHN  Immigrant 0.657*** (0.073) 0.637*** (0.108) 0.118*** (0.033) 0.368*** (0.040)
BRA  Immigrant 0.586*** (0.074) 0.665*** (0.108) 0.092*** (0.032) 0.378*** (0.040)
USA  Immigrant 0.583*** (0.080) 0.606*** (0.117) 0.149** (0.060) 0.392*** (0.044)
IDN  Immigrant 0.576*** (0.074) 0.678*** (0.108) 0.108*** (0.030) 0.356*** (0.041)
AUS  Immigrant 0.556*** (0.087) 0.776*** (0.127) 0.167** (0.074) 0.412*** (0.048)
TUR  Immigrant 0.545*** (0.075) 0.684*** (0.109) 0.018 (0.100) 0.332*** (0.041)
IND  Immigrant 0.542*** (0.074) 0.694*** (0.108) 0.071 (0.218) 0.372*** (0.040)
KOR  Immigrant 0.529*** (0.074) 0.266** (0.109) 0.059 (0.146) 0.289*** (0.041)
ITA  Immigrant 0.517*** (0.076) 0.353*** (0.111) 0.109*** (0.031) 0.328*** (0.042)
RUS  Immigrant 0.503*** (0.073) 0.626*** (0.106) 0.103*** (0.029) 0.334*** (0.040)
ESP  Immigrant 0.495*** (0.078) 0.466*** (0.114) 0.105*** (0.032) 0.329*** (0.043)
CAN  Immigrant 0.491*** (0.085) 0.586*** (0.124) 0.087*** (0.033) 0.322*** (0.047)
FIN  Immigrant 0.444*** (0.076) 0.352*** (0.111) 0.056* (0.031) 0.262*** (0.042)
IRL  Immigrant 0.437*** (0.082) 0.545*** (0.120) 0.216*** (0.034) 0.086* (0.045)
FRA  Immigrant 0.425*** (0.077) 0.532*** (0.112) 0.116*** (0.031) 0.319*** (0.042)
ROM  Immigrant 0.417*** (0.074) 0.617*** (0.108) 0.095*** (0.030) 0.261*** (0.041)
GRC  Immigrant 0.393*** (0.075) 0.510*** (0.109) 0.082*** (0.031) 0.279*** (0.041)
BGR  Immigrant 0.389*** (0.074) 0.393*** (0.108) 0.078*** (0.030) 0.224*** (0.041)
PRT  Immigrant 0.366*** (0.075) 0.486*** (0.110) 0.096*** (0.031) 0.275*** (0.041)
SWE  Immigrant 0.341*** (0.079) 0.406*** (0.115) 0.064** (0.032) 0.256*** (0.043)
POL  Immigrant 0.340*** (0.074) 0.514*** (0.108) 0.086*** (0.030) 0.243*** (0.041)
MEX  Immigrant 0.334*** (0.074) 0.639*** (0.108) 0.105*** (0.029) 0.274*** (0.041)
TWN  Immigrant 0.333*** (0.075) 0.253** (0.110) 0.061** (0.029) 0.215*** (0.041)
LTU  Immigrant 0.327*** (0.076) 0.126 (0.111) 0.054* (0.031) 0.181*** (0.042)
DEU  Immigrant 0.304*** (0.080) 0.291** (0.117) 0.102*** (0.033) 0.281*** (0.044)
CZE  Immigrant 0.259*** (0.075) 0.462*** (0.109) 0.070** (0.031) 0.176*** (0.041)
GBR  Immigrant 0.254*** (0.078) 0.487*** (0.114) 0.091*** (0.032) 0.310*** (0.043)
AUT  Immigrant 0.252*** (0.081) 0.390*** (0.118) 0.075** (0.033) 0.232*** (0.044)
 P. Zhang / World Development 129 (2020) 104863 15

Table A.1 (continued)

(1) (2) (3) (4)

Manufacturing (Baseline) Agricultural Service Total
CYP  Immigrant 0.240*** (0.083) 0.331*** (0.121) 0.078** (0.034) 0.264*** (0.046)
LVA  Immigrant 0.207** (0.082) 0.489*** (0.120) 0.095*** (0.034) 0.273*** (0.045)
HUN  Immigrant 0.191** (0.076) 0.346*** (0.111) 0.022 (0.031) 0.108*** (0.042)
SVK  Immigrant 0.181** (0.075) 0.341*** (0.110) 0.070** (0.031) 0.180*** (0.042)
SVN  Immigrant 0.159** (0.074) 0.482*** (0.109) 0.093*** (0.031) 0.209*** (0.041)
EST  Immigrant 0.127 (0.085) 0.598*** (0.124) 0.084** (0.035) 0.236*** (0.046)
DNK  Immigrant 0.116 (0.077) 0.545*** (0.112) 0.032 (0.032) 0.223*** (0.042)
NLD  Immigrant 0.107 (0.078) 0.012 (0.114) 0.027 (0.032) 0.198*** (0.043)
BEL  Immigrant 0.049 (0.080) 0.161 (0.117) 0.027 (0.033) 0.149*** (0.044)
MLT  Immigrant 0.013 (0.079) 0.485*** (0.114) 0.013 (0.032) 0.109** (0.043)
LUX  Immigrant 0.156 (0.104) 0.018 (0.151) 0.450*** (0.043) 0.120** (0.057)
Observations 1600 1600 1600 1600
Adjusted R2 0.973 0.963 0.998 0.995
Mean 0.352 0.448 0.053 0.257
Std 0.189 0.200 0.103 0.100

Notes: Table reports the estimates of home-biased gravity equation with sectoral trade flow data. Exporter- and importer-specific fixed effects are both included. Robust
standard errors in parentheses. Significance *.10, **.05, ***.01.

Table A.2
Home-biased Gravity Estimates: by Good.

(1) (2) (3)

Aggregate (Baseline) Final Intermediate

Distance 0.009*** (0.001) 0.008*** (0.001) 0.009*** (0.001)

Border 0.023*** (0.002) 0.023*** (0.002) 0.023*** (0.002)
Language 0.014*** (0.002) 0.015*** (0.002) 0.013*** (0.002)
Tariff 0.008*** (0.001) 0.006*** (0.001) 0.008*** (0.001)
Income 0.006*** (0.001) 0.004*** (0.001) 0.002** (0.001)
Internal 0.141** (0.071) 0.012 (0.075) 0.263*** (0.072)
JPN  Immigrant 0.670*** (0.075) 0.770*** (0.079) 0.578*** (0.076)
CHN  Immigrant 0.657*** (0.073) 0.831*** (0.078) 0.553*** (0.075)
BRA  Immigrant 0.586*** (0.074) 0.828*** (0.078) 0.451*** (0.076)
USA  Immigrant 0.583*** (0.080) 0.748*** (0.084) 0.496*** (0.082)
IDN  Immigrant 0.576*** (0.074) 0.866*** (0.078) 0.411*** (0.075)
AUS  Immigrant 0.556*** (0.087) 0.733*** (0.092) 0.498*** (0.089)
TUR  Immigrant 0.545*** (0.075) 0.741*** (0.079) 0.436*** (0.076)
IND  Immigrant 0.542*** (0.074) 0.810*** (0.079) 0.411*** (0.076)
KOR  Immigrant 0.529*** (0.074) 0.695*** (0.079) 0.429*** (0.076)
ITA  Immigrant 0.517*** (0.076) 0.656*** (0.080) 0.422*** (0.078)
RUS  Immigrant 0.503*** (0.073) 0.535*** (0.077) 0.497*** (0.074)
ESP  Immigrant 0.495*** (0.078) 0.631*** (0.083) 0.419*** (0.080)
CAN  Immigrant 0.491*** (0.085) 0.703*** (0.090) 0.418*** (0.087)
FIN  Immigrant 0.444*** (0.076) 0.529*** (0.080) 0.375*** (0.078)
IRL  Immigrant 0.437*** (0.082) 0.525*** (0.087) 0.349*** (0.084)
FRA  Immigrant 0.425*** (0.077) 0.625*** (0.081) 0.322*** (0.078)
ROM  Immigrant 0.417*** (0.074) 0.689*** (0.078) 0.259*** (0.075)
GRC  Immigrant 0.393*** (0.075) 0.596*** (0.079) 0.287*** (0.076)
BGR  Immigrant 0.389*** (0.074) 0.547*** (0.078) 0.320*** (0.076)
PRT  Immigrant 0.366*** (0.075) 0.500*** (0.080) 0.316*** (0.077)
SWE  Immigrant 0.341*** (0.079) 0.476*** (0.083) 0.251*** (0.080)
POL  Immigrant 0.340*** (0.074) 0.573*** (0.078) 0.225*** (0.076)
MEX  Immigrant 0.334*** (0.074) 0.697*** (0.078) 0.094 (0.075)
TWN  Immigrant 0.333*** (0.075) 0.572*** (0.079) 0.242*** (0.077)
LTU  Immigrant 0.327*** (0.076) 0.554*** (0.081) 0.150* (0.078)
DEU  Immigrant 0.304*** (0.080) 0.530*** (0.084) 0.179** (0.082)
CZE  Immigrant 0.259*** (0.075) 0.473*** (0.079) 0.131* (0.076)
GBR  Immigrant 0.254*** (0.078) 0.375*** (0.082) 0.174** (0.080)
AUT  Immigrant 0.252*** (0.081) 0.372*** (0.085) 0.156* (0.082)
CYP  Immigrant 0.240*** (0.083) 0.347*** (0.088) 0.221*** (0.085)
LVA  Immigrant 0.207** (0.082) 0.378*** (0.087) 0.120 (0.084)
HUN  Immigrant 0.191** (0.076) 0.478*** (0.080) 0.040 (0.078)
SVK  Immigrant 0.181** (0.075) 0.384*** (0.080) 0.049 (0.077)
SVN  Immigrant 0.159** (0.074) 0.257*** (0.079) 0.089 (0.076)
EST  Immigrant 0.127 (0.085) 0.319*** (0.089) 0.003 (0.086)
DNK  Immigrant 0.116 (0.077) 0.179** (0.081) 0.068 (0.079)
NLD  Immigrant 0.107 (0.078) 0.205** (0.083) 0.018 (0.080)
BEL  Immigrant 0.049 (0.080) 0.191** (0.084) 0.055 (0.082)
MLT  Immigrant 0.013 (0.079) 0.172** (0.083) 0.174** (0.080)
LUX  Immigrant 0.156 (0.104) 0.011 (0.110) 0.281*** (0.107)
Observations 1600 1600 1600
Adjusted R2 0.973 0.972 0.974
Mean 0.352 0.528 0.248
Std 0.189 0.207 0.198

Notes: Table reports the estimates of home-biased gravity equation with intermediate and final trade flow data. Exporter- and importer-specific fixed effects are both
included. Robust standard errors in parentheses. Significance *.10, **.05, ***.01.
Table A.3

16
Home-biased Gravity Estimates: by Industry I.

(1) (2) (3) (4) (5) (6) (7) (8)

Baseline Mining Textile Leather and Wood Printing and Coke, refined Chemicals
footwear products publishing petroleum
Distance 0.009*** (0.001) 0.007*** (0.001) 0.006*** (0.002) 0.008*** (0.003) 0.007*** (0.001) 0.004*** (0.001) 0.021*** (0.003) 0.012*** (0.001)
Border 0.023*** (0.002) 0.022*** (0.002) 0.022*** (0.004) 0.027*** (0.005) 0.021*** (0.002) 0.021*** (0.002) 0.042*** (0.006) 0.024*** (0.003)
Language 0.014*** (0.002) 0.013*** (0.002) 0.016*** (0.004) 0.013*** (0.005) 0.009*** (0.002) 0.012*** (0.002) 0.013** (0.006) 0.017*** (0.003)
Tariff 0.008*** (0.001) 0.004*** (0.001) 0.010*** (0.002) 0.005** (0.002) 0.002** (0.001) 0.007*** (0.001) 0.001 (0.002) 0.011*** (0.001)
Income 0.006*** (0.001) 0.004*** (0.001) 0.002 (0.002) 0.003** (0.001) 0.001* (0.001) 0.002*** (0.001) 0.002 (0.001) 0.005*** (0.001)
Internal 0.141** (0.071) 0.240*** (0.069) 0.541*** (0.125) 0.519*** (0.165) 0.496*** (0.067) 0.493*** (0.064) 0.567*** (0.182) 0.059 (0.091)
JPN  Immigrant 0.670*** (0.075) 0.637*** (0.073) 1.112*** (0.131) 0.868*** (0.173) 0.321*** (0.070) 0.415*** (0.067) 1.414*** (0.191) 0.844*** (0.095)
CHN  Immigrant 0.657*** (0.073) 0.684*** (0.072) 1.283*** (0.129) 1.271*** (0.171) 0.435*** (0.069) 0.398*** (0.066) 1.459*** (0.188) 0.841*** (0.094)
BRA  Immigrant 0.586*** (0.074) 0.636*** (0.072) 1.303*** (0.130) 1.367*** (0.172) 0.416*** (0.070) 0.335*** (0.067) 1.429*** (0.190) 0.674*** (0.095)
USA  Immigrant 0.583*** (0.080) 0.713*** (0.078) 1.006*** (0.141) 0.538*** (0.186) 0.322*** (0.076) 0.396*** (0.072) 1.505*** (0.205) 0.802*** (0.102)
IDN  Immigrant 0.576*** (0.074) 0.657*** (0.072) 1.178*** (0.130) 1.256*** (0.171) 0.433*** (0.070) 0.336*** (0.066) 1.220*** (0.189) 0.763*** (0.094)
AUS  Immigrant 0.556*** (0.087) 0.723*** (0.085) 1.015*** (0.153) 1.303*** (0.202) 0.431*** (0.082) 0.398*** (0.078) 1.515*** (0.223) 0.634*** (0.111)
TUR  Immigrant 0.545*** (0.075) 0.678*** (0.073) 1.196*** (0.131) 1.384*** (0.173) 0.326*** (0.071) 0.382*** (0.067) 1.360*** (0.192) 0.870*** (0.095)
IND  Immigrant 0.542*** (0.074) 0.603*** (0.073) 1.311*** (0.131) 1.374*** (0.173) 0.386*** (0.070) 0.278*** (0.067) 1.495*** (0.191) 0.666*** (0.095)
KOR  Immigrant 0.529*** (0.074) 0.563*** (0.073) 1.216*** (0.131) 1.050*** (0.173) 0.310*** (0.070) 0.289*** (0.067) 1.375*** (0.191) 0.638*** (0.095)
ITA  Immigrant 0.517*** (0.076) 0.557*** (0.075) 1.252*** (0.134) 1.143*** (0.177) 0.285*** (0.072) 0.319*** (0.068) 1.375*** (0.195) 0.523*** (0.097)

P. Zhang / World Development 129 (2020) 104863

RUS  Immigrant 0.503*** (0.073) 0.591*** (0.071) 0.544*** (0.128) 0.516*** (0.169) 0.341*** (0.069) 0.291*** (0.065) 1.491*** (0.186) 0.564*** (0.093)
ESP  Immigrant 0.495*** (0.078) 0.622*** (0.076) 0.804*** (0.138) 0.923*** (0.182) 0.335*** (0.074) 0.330*** (0.070) 1.249*** (0.200) 0.513*** (0.100)
CAN  Immigrant 0.491*** (0.085) 0.582*** (0.083) 1.038*** (0.149) 0.555*** (0.197) 0.449*** (0.080) 0.291*** (0.076) 1.471*** (0.217) 0.634*** (0.108)
FIN  Immigrant 0.444*** (0.076) 0.535*** (0.074) 0.704*** (0.134) 0.574*** (0.177) 0.340*** (0.072) 0.354*** (0.068) 1.151*** (0.195) 0.333*** (0.097)
IRL  Immigrant 0.437*** (0.082) 0.335*** (0.081) 0.693*** (0.145) 0.600*** (0.192) 0.245*** (0.078) 0.375*** (0.074) 0.881*** (0.212) 0.606*** (0.105)
FRA  Immigrant 0.425*** (0.077) 0.536*** (0.075) 0.837*** (0.135) 0.447** (0.178) 0.238*** (0.072) 0.268*** (0.069) 1.258*** (0.196) 0.390*** (0.098)
ROM  Immigrant 0.417*** (0.074) 0.592*** (0.072) 0.838*** (0.130) 0.448*** (0.171) 0.283*** (0.070) 0.233*** (0.066) 1.188*** (0.189) 0.307*** (0.094)
GRC  Immigrant 0.393*** (0.075) 0.520*** (0.073) 1.050*** (0.132) 1.107*** (0.174) 0.146** (0.071) 0.245*** (0.067) 1.302*** (0.192) 0.282*** (0.096)
BGR  Immigrant 0.389*** (0.074) 0.367*** (0.072) 1.335*** (0.130) 1.164*** (0.172) 0.240*** (0.070) 0.111* (0.067) 1.316*** (0.190) 0.273*** (0.095)
PRT  Immigrant 0.366*** (0.075) 0.420*** (0.074) 1.138*** (0.133) 1.044*** (0.175) 0.354*** (0.071) 0.153** (0.068) 1.250*** (0.193) 0.369*** (0.096)
SWE  Immigrant 0.341*** (0.079) 0.452*** (0.077) 0.550*** (0.139) 0.000 (.) 0.352*** (0.074) 0.316*** (0.071) 0.506** (0.202) 0.230** (0.101)
POL  Immigrant 0.340*** (0.074) 0.562*** (0.073) 0.671*** (0.130) 0.753*** (0.172) 0.322*** (0.070) 0.177*** (0.067) 1.304*** (0.190) 0.349*** (0.095)
MEX  Immigrant 0.334*** (0.074) 0.612*** (0.072) 1.063*** (0.130) 1.317*** (0.171) 0.257*** (0.070) 0.145** (0.066) 1.103*** (0.189) 0.501*** (0.094)
TWN  Immigrant 0.333*** (0.075) 0.528*** (0.074) 1.111*** (0.132) 0.404** (0.175) 0.095 (0.071) 0.106 (0.068) 1.311*** (0.193) 0.553*** (0.096)
LTU  Immigrant 0.327*** (0.076) 0.430*** (0.075) 0.952*** (0.135) 1.247*** (0.178) 0.175** (0.072) 0.096 (0.069) 0.993*** (0.196) 0.626*** (0.098)
DEU  Immigrant 0.304*** (0.080) 0.420*** (0.078) 0.483*** (0.141) 0.440** (0.186) 0.189** (0.076) 0.102 (0.072) 1.247*** (0.205) 0.095 (0.102)
CZE  Immigrant 0.259*** (0.075) 0.454*** (0.073) 0.756*** (0.132) 0.482*** (0.174) 0.308*** (0.071) 0.059 (0.067) 1.083*** (0.192) 0.153 (0.096)
GBR  Immigrant 0.254*** (0.078) 0.375*** (0.076) 0.701*** (0.137) 0.498*** (0.181) 0.195*** (0.074) 0.279*** (0.070) 0.924*** (0.200) 0.086 (0.100)
AUT  Immigrant 0.252*** (0.081) 0.427*** (0.079) 0.664*** (0.142) 0.529*** (0.188) 0.261*** (0.076) 0.136* (0.073) 0.793*** (0.207) 0.193* (0.103)
CYP  Immigrant 0.240*** (0.083) 0.398*** (0.082) 0.613*** (0.147) 0.664*** (0.194) 0.295*** (0.079) 0.196*** (0.075) 0.000 (.) 0.023 (0.107)
LVA  Immigrant 0.207** (0.082) 0.324*** (0.080) 0.861*** (0.145) 0.722*** (0.191) 0.393*** (0.078) 0.105 (0.074) 0.000 (.) 0.028 (0.105)
HUN  Immigrant 0.191** (0.076) 0.449*** (0.074) 0.773*** (0.134) 0.658*** (0.177) 0.084 (0.072) 0.123* (0.068) 1.180*** (0.195) 0.157 (0.097)
SVK  Immigrant 0.181** (0.075) 0.307*** (0.074) 0.564*** (0.133) 0.504*** (0.175) 0.263*** (0.071) 0.010 (0.068) 1.211*** (0.194) 0.124 (0.096)
SVN  Immigrant 0.159** (0.074) 0.318*** (0.073) 0.919*** (0.131) 0.799*** (0.173) 0.067 (0.070) 0.142** (0.067) 0.470** (0.191) 0.092 (0.095)
EST  Immigrant 0.127 (0.085) 0.330*** (0.083) 0.621*** (0.149) 0.566*** (0.197) 0.178** (0.080) 0.046 (0.076) 0.539** (0.217) 0.016 (0.108)
DNK  Immigrant 0.116 (0.077) 0.195*** (0.075) 0.513*** (0.136) 0.478*** (0.179) 0.063 (0.073) 0.156** (0.069) 0.722*** (0.198) 0.190* (0.098)
NLD  Immigrant 0.107 (0.078) 0.227*** (0.076) 0.551*** (0.138) 0.541*** (0.182) 0.107 (0.074) 0.115 (0.070) 0.725*** (0.200) 0.095 (0.100)
BEL  Immigrant 0.049 (0.080) 0.139* (0.078) 0.674*** (0.141) 0.596*** (0.186) 0.157** (0.076) 0.005 (0.072) 0.936*** (0.205) 0.041 (0.102)
MLT  Immigrant 0.013 (0.079) 0.058 (0.077) 0.742*** (0.139) 0.501*** (0.183) 0.241*** (0.074) 0.031 (0.071) 0.425** (0.202) 0.009 (0.101)
LUX  Immigrant 0.156 (0.104) 0.380*** (0.102) 1.095*** (0.184) 0.665*** (0.242) 0.290*** (0.099) 0.623*** (0.094) 0.588** (0.268) 0.032 (0.133)
Observations 1600 1600 1600 1560 1600 1600 1520 1600
Adjusted R2 0.973 0.984 0.899 0.842 0.986 0.986 0.882 0.944
Mean 0.352 0.454 0.893 0.783 0.222 0.196 1.069 0.375
Std 0.189 0.207 0.258 0.349 0.191 0.180 0.397 0.276

Notes: Table reports the estimates of home-biased gravity equation with industrial trade flow data. Exporter- and importer-specific fixed effects are both included. Robust standard errors in parentheses. Significance *.10, **.05,
***.01.
Table A.4
Home-biased Gravity Estimates: by Industry II.

(1) (2) (3) (4) (5) (6) (7) (8)

Baseline Rubber Other nonme- Metals Machinery Electrical optical Transport Manufacturing
and tallic minerals equipment and equipment and recycling
plastics
Distance 0.009*** (0.001) 0.011*** (0.001) 0.008*** (0.001) 0.010*** (0.001) 0.008*** (0.002) 0.011*** (0.002) 0.004** (0.002) 0.010*** (0.002)
Border 0.023*** (0.002) 0.029*** (0.003) 0.017*** (0.002) 0.026*** (0.003) 0.024*** (0.003) 0.013*** (0.003) 0.022*** (0.004) 0.022*** (0.003)
Language 0.014*** (0.002) 0.014*** (0.003) 0.006*** (0.002) 0.012*** (0.003) 0.014*** (0.003) 0.012*** (0.003) 0.020*** (0.004) 0.020*** (0.003)
Tariff 0.008*** (0.001) 0.011*** (0.001) 0.002** (0.001) 0.008*** (0.001) 0.015*** (0.001) 0.010*** (0.001) 0.016*** (0.002) 0.004** (0.002)
Income 0.006*** (0.001) 0.002* (0.001) 0.001* (0.001) 0.000 (0.001) 0.001 (0.001) 0.001 (0.001) 0.003*** (0.001) 0.003** (0.002)
Internal 0.141** (0.071) 0.368*** (0.097) 0.728*** (0.058) 0.217** (0.085) 0.108 (0.106) 0.054 (0.109) 0.178 (0.123) 0.115 (0.114)
JPN  Immigrant 0.670*** (0.075) 0.437*** (0.102) 0.167*** (0.061) 0.619*** (0.089) 0.885*** (0.112) 0.604*** (0.115) 1.006*** (0.129) 0.587*** (0.120)
CHN  Immigrant 0.657*** (0.073) 0.445*** (0.100) 0.212*** (0.060) 0.634*** (0.088) 0.807*** (0.110) 0.508*** (0.113) 0.936*** (0.127) 0.560*** (0.119)
BRA  Immigrant 0.586*** (0.074) 0.325*** (0.101) 0.175*** (0.061) 0.514*** (0.088) 0.621*** (0.111) 0.431*** (0.114) 0.789*** (0.128) 0.716*** (0.119)
USA  Immigrant 0.583*** (0.080) 0.373*** (0.109) 0.075 (0.066) 0.556*** (0.095) 0.699*** (0.120) 0.344*** (0.123) 0.781*** (0.138) 0.365*** (0.129)
IDN  Immigrant 0.576*** (0.074) 0.278*** (0.101) 0.175*** (0.061) 0.117 (0.088) 0.176 (0.110) 0.530*** (0.113) 0.913*** (0.127) 0.415*** (0.119)
AUS  Immigrant 0.556*** (0.087) 0.189 (0.119) 0.182** (0.071) 0.621*** (0.104) 0.525*** (0.130) 0.072 (0.134) 0.752*** (0.150) 0.611*** (0.140)
TUR  Immigrant 0.545*** (0.075) 0.298*** (0.102) 0.011 (0.062) 0.360*** (0.089) 0.735*** (0.112) 0.478*** (0.115) 0.243* (0.129) 0.460*** (0.120)
IND  Immigrant 0.542*** (0.074) 0.317*** (0.102) 0.117* (0.061) 0.529*** (0.089) 0.634*** (0.111) 0.423*** (0.115) 0.777*** (0.129) 0.009 (0.120)
KOR  Immigrant 0.529*** (0.074) 0.309*** (0.102) 0.058 (0.061) 0.489*** (0.089) 0.598*** (0.112) 0.466*** (0.115) 0.845*** (0.129) 0.570*** (0.120)

P. Zhang / World Development 129 (2020) 104863

ITA  Immigrant 0.517*** (0.076) 0.286*** (0.104) 0.126** (0.063) 0.494*** (0.091) 0.730*** (0.114) 0.403*** (0.117) 0.562*** (0.132) 0.630*** (0.123)
RUS  Immigrant 0.503*** (0.073) 0.419*** (0.099) 0.172*** (0.060) 0.593*** (0.087) 0.527*** (0.109) 0.492*** (0.112) 0.533*** (0.125) 0.617*** (0.117)
ESP  Immigrant 0.495*** (0.078) 0.262** (0.107) 0.156** (0.064) 0.526*** (0.093) 0.604*** (0.117) 0.232* (0.120) 0.552*** (0.135) 0.605*** (0.126)
CAN  Immigrant 0.491*** (0.085) 0.253** (0.116) 0.013 (0.070) 0.472*** (0.101) 0.525*** (0.127) 0.069 (0.131) 0.814*** (0.147) 0.475*** (0.137)
FIN  Immigrant 0.444*** (0.076) 0.133 (0.104) 0.066 (0.063) 0.360*** (0.091) 0.732*** (0.114) 0.451*** (0.117) 0.279** (0.131) 0.428*** (0.123)
IRL  Immigrant 0.437*** (0.082) 0.096 (0.113) 0.020 (0.068) 0.218** (0.099) 0.153 (0.124) 0.650*** (0.127) 0.318** (0.143) 0.101 (0.133)
FRA  Immigrant 0.425*** (0.077) 0.209** (0.105) 0.032 (0.063) 0.474*** (0.092) 0.615*** (0.115) 0.218* (0.118) 0.653*** (0.132) 0.416*** (0.124)
ROM  Immigrant 0.417*** (0.074) 0.142 (0.101) 0.110* (0.061) 0.352*** (0.088) 0.329*** (0.111) 0.035 (0.114) 0.711*** (0.128) 0.496*** (0.119)
GRC  Immigrant 0.393*** (0.075) 0.142 (0.102) 0.065 (0.062) 0.455*** (0.089) 0.229** (0.112) 0.195* (0.115) 0.346*** (0.129) 0.437*** (0.121)
BGR  Immigrant 0.389*** (0.074) 0.022 (0.101) 0.026 (0.061) 0.472*** (0.088) 0.355*** (0.111) 0.116 (0.114) 0.173 (0.128) 0.464*** (0.119)
PRT  Immigrant 0.366*** (0.075) 0.079 (0.103) 0.079 (0.062) 0.319*** (0.090) 0.389*** (0.113) 0.310*** (0.116) 0.331** (0.130) 0.504*** (0.122)
SWE  Immigrant 0.341*** (0.079) 0.140 (0.108) 0.031 (0.065) 0.328*** (0.094) 0.525*** (0.118) 0.139 (0.121) 0.795*** (0.136) 0.191 (0.127)
POL  Immigrant 0.340*** (0.074) 0.107 (0.101) 0.060 (0.061) 0.256*** (0.088) 0.328*** (0.111) 0.086 (0.114) 0.352*** (0.128) 0.419*** (0.119)
MEX  Immigrant 0.334*** (0.074) 0.144 (0.101) 0.101* (0.061) 0.205** (0.088) 0.091 (0.111) 0.014 (0.114) 0.428*** (0.128) 0.655*** (0.119)
TWN  Immigrant 0.333*** (0.075) 0.013 (0.103) 0.025 (0.062) 0.369*** (0.090) 0.477*** (0.113) 0.038 (0.116) 0.638*** (0.130) 0.130 (0.121)
LTU  Immigrant 0.327*** (0.076) 0.102 (0.104) 0.168*** (0.063) 0.009 (0.091) 0.084 (0.114) 0.018 (0.118) 0.482*** (0.132) 0.550*** (0.123)
DEU  Immigrant 0.304*** (0.080) 0.011 (0.109) 0.047 (0.066) 0.325*** (0.095) 0.620*** (0.120) 0.139 (0.123) 0.588*** (0.138) 0.292** (0.129)
CZE  Immigrant 0.259*** (0.075) 0.109 (0.102) 0.033 (0.062) 0.229** (0.089) 0.414*** (0.112) 0.098 (0.115) 0.655*** (0.129) 0.316*** (0.121)
GBR  Immigrant 0.254*** (0.078) 0.188* (0.107) 0.012 (0.064) 0.294*** (0.093) 0.509*** (0.117) 0.007 (0.120) 0.414*** (0.135) 0.290** (0.126)
AUT  Immigrant 0.252*** (0.081) 0.180 (0.110) 0.017 (0.066) 0.316*** (0.096) 0.477*** (0.121) 0.119 (0.124) 0.171 (0.139) 0.391*** (0.130)
CYP  Immigrant 0.240*** (0.083) 0.049 (0.114) 0.109 (0.069) 0.253** (0.100) 0.159 (0.125) 0.081 (0.129) 0.154 (0.144) 0.355*** (0.135)
LVA  Immigrant 0.207** (0.082) 0.196* (0.112) 0.184*** (0.068) 0.067 (0.098) 0.061 (0.123) 0.034 (0.127) 0.125 (0.142) 0.273** (0.132)
HUN  Immigrant 0.191** (0.076) 0.093 (0.104) 0.156** (0.063) 0.068 (0.091) 0.564*** (0.114) 0.029 (0.117) 0.366*** (0.131) 0.272** (0.123)
SVK  Immigrant 0.181** (0.075) 0.024 (0.103) 0.015 (0.062) 0.208** (0.090) 0.171 (0.113) 0.097 (0.116) 0.450*** (0.130) 0.095 (0.122)
SVN  Immigrant 0.159** (0.074) 0.037 (0.102) 0.120* (0.061) 0.179** (0.089) 0.173 (0.112) 0.115 (0.115) 0.170 (0.129) 0.334*** (0.120)
EST  Immigrant 0.127 (0.085) 0.431*** (0.116) 0.292*** (0.070) 0.117 (0.101) 0.113 (0.127) 0.048 (0.130) 0.252* (0.146) 0.147 (0.136)
DNK  Immigrant 0.116 (0.077) 0.236** (0.105) 0.158** (0.063) 0.101 (0.092) 0.225* (0.115) 0.177 (0.119) 0.123 (0.133) 0.004 (0.124)
NLD  Immigrant 0.107 (0.078) 0.418*** (0.107) 0.178*** (0.064) 0.090 (0.093) 0.201* (0.117) 0.127 (0.120) 0.160 (0.135) 0.239* (0.126)
BEL  Immigrant 0.049 (0.080) 0.397*** (0.109) 0.176*** (0.066) 0.065 (0.095) 0.124 (0.120) 0.051 (0.123) 0.168 (0.138) 0.022 (0.129)
MLT  Immigrant 0.013 (0.079) 0.364*** (0.108) 0.262*** (0.065) 0.054 (0.094) 0.034 (0.118) 0.008 (0.121) 0.151 (0.136) 0.241* (0.127)
LUX  Immigrant 0.156 (0.104) 0.524*** (0.143) 0.426*** (0.086) 0.025 (0.125) 0.094 (0.156) 0.164 (0.161) 0.187 (0.180) 0.208 (0.168)
Observations 1600 1600 1600 1600 1600 1600 1600 1600
Adjusted R2 0.973 0.951 0.989 0.967 0.917 0.892 0.901 0.930
Mean 0.352 0.050 0.001 0.311 0.408 0.192 0.479 0.349
Std 0.189 0.256 0.145 0.198 0.240 0.214 0.266 0.230

Notes: Table reports the estimates of home-biased gravity equation with industrial trade flow data. Exporter- and importer-specific fixed effects are both included. Robust standard errors in parentheses. Significance *.10, **.05,
***.01.

17
18 P. Zhang / World Development 129 (2020) 104863

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