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Quarterly Journal of Economics Vol. 134 No. 2 2019

The More We Die, The More We Sell? A Simple Test of the Home-Market Effect*

Arnaud Costinot1; Dave Donaldson1; Margaret Kyle2; Heidi Williams3

1 Massachusetts Institute of Technology, Centre for Economic and Policy Research, and National Bureau of Economic Research · 2 MINES ParisTech and Centre for Economic and Policy Research · 3 Masschusetts Institute of Technology and National Bureau of Economic Research

open access

Abstract

The home-market effect, first hypothesized by Linder (1961) and later formalized by Krugman (1980), is the idea that countries with larger demand for some products at home tend to have larger sales of the same products abroad. In this article, we develop a simple test of the home-market effect using detailed drug sales data from the global pharmaceutical industry. The core of our empirical strategy is the observation that a country's exogenous demographic composition can be used as a predictor of the diseases that its inhabitants are most likely to die from and, in turn, the drugs they are most likely to demand. We find that the correlation between predicted home demand and sales abroad is positive and greater than the correlation between predicted home demand and purchases from abroad. In short, countries tend to be net sellers of the drugs they demand the most, as predicted by Linder (1961) and Krugman (1980).

DOI
10.1093/qje/qjz003
Volume
134
Issue
2
Pages
843-894
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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