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Trade responses to geographic frictions: A decomposition using micro-data

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Author Info
Hillberry, Russell
Hummels, David

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Abstract

A large literature has shown that geographic frictions reduce trade, but has not clarified precisely why. In this paper, we provide some insight into why such frictions matter by examining what parts of trade these frictions reduce most. Using data that track manufacturers' shipments within the US on an exceptionally fine grid, we find that the pattern of shipments is extremely localized. Shipments within 5-digit zip codes, which have a median radius of just 4 miles, are 3 times larger than shipments outside the zip code. We decompose aggregate shipments into extensive and intensive margins, and show that distance and other frictions reduce aggregate trade values primarily by reducing the number of commodities shipped and the number of establishments shipping. Extensive margins are particularly important over very short distances. We examine trade in intermediate goods as an explanation for highly localized shipments and the dominant role of the extensive margin and find evidence consistent with this hypothesis. In another significant finding, we find no evidence of state-level home bias when distances are measured precisely and trade is observed over a very fine grid.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 52 (2008)
Issue (Month): 3 (April)
Pages: 527-550
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Handle: RePEc:eee:eecrev:v:52:y:2008:i:3:p:527-550

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kancs, d'Artis, 2007. "Trade Growth in a Heterogeneous Firm Model: Evidence from South Easten Europe," Working Papers of Institute for Economic Forecasting 071201, Institute for Economic Forecasting. [Downloadable!]
  2. Heinemeyer, Hans Christian & Schulze, Max Stephan & Wolf, Nikolaus, 2008. "Endogenous Borders? Exploring a Natural Experiment on Border Effects," CEPR Discussion Papers 6909, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Matthieu Crozet & Pamina Koenig, 2007. "Structural gravity equations with intensive and extensive margins," EconomiX Working Papers 2007-36, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
    Other versions:
  4. Richard Harris & Victoria Kravtsova, 2009. "In Search of W," SERC Discussion Papers 0017, Spatial Economics Research Centre, LSE. [Downloadable!]
  5. Richard Pomfret & Patricia Sourd in, 2008. "Why Do Trade Costs Vary?," Working Papers 2008-08, University of Adelaide, School of Economics. [Downloadable!]
  6. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," NBER Working Papers 13054, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Kei-Mu Yi, 2005. "Vertical specialization and the border effect puzzle," Working Papers 05-24, Federal Reserve Bank of Philadelphia. [Downloadable!]
  8. Gene M. Grossman & Esteban Rossi-Hansberg, 2006. "The rise of offshoring: it's not wine for cloth anymore," Proceedings, Federal Reserve Bank of Kansas City, pages 59-102. [Downloadable!]
  9. d'Artis Kancs, 2007. "Trade growth in a heterogeneous firm model: Evidence from South Eastern Europe," Working Papers 07-09, Spanish Chapter of the International Economics and Finance Society. [Downloadable!]
    Other versions:
  10. Yao Li, 2009. "Borders and Distance in Knowledge Spillovers: Dying over Time or Dying with Age? - Evidence from Patent Citations," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. Robert C. Feenstra & Barbara J. Spencer, 2005. "Contractual Versus Generic Outsourcing: The Role of Proximity," NBER Working Papers 11885, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Hans-Christian Heinemeyer & Max-Stephan Schulze & Nikolaus Wolf, 2008. "Endogenous Borders? The Effects of New Borders on Trade in Central Europe 1885-1933," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  13. Kei-Mu Yi, 2008. "Can multi-stage production explain the home bias in trade?," Working Papers 08-12, Federal Reserve Bank of Philadelphia. [Downloadable!]
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