Similarity of income distributions and the extensive and intensive margin of bilateral trade flows

Abstract

This paper investigates empirically how similarity of demand structures - approximated by similarity of income distributions - affects trade patterns along both the extensive and intensive margin. The idea that similarity of demand structures intensifies trade goes back to the well-known Linder hypothesis. Based on a sample of 102 countries, I find that bilateral trade volumes are increasing in the overlap of two countries income distributions. This effect is driven by both the extensive and intensive margin. I establish two novel mea Show more