Professor Tarun Ramadorai will be presenting "Gravity, Counterparties, and Foreign Investment"
We propose a new explanation for the granular origins of gravity in decentralized investment markets based on newly uncovered facts from large cross-border commercial real-estate transactions. Across a wide range of countries, buyers preferentially match with counterparties from own or proximate countries. We attribute this novel finding to trust-based solutions to frictions in the legal and contractual environment in the destination market. The perpetuation of gravity can be explained using this preferential matching plus the spatial distribution of potential counterparties, which is well-explained
by historical links between countries. We set up and estimate an equilibrium matching model with such a contracting/trust friction. The model provides a structural interpretation of the volume, price, and matching patterns that we see in the data.