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Hedging Price Volatility Using Fast Transport

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  • David L. Hummels
  • Georg Schaur

Abstract

Purchasing goods from distant locations introduces a significant lag between when a product is shipped and when it arrives. This is problematic for firms facing volatile demand, who must place orders before knowing the resolution of demand uncertainty. We provide a model in which airplanes bring producers and consumers together in time. Fast transport allows firms to respond quickly to favorable demand realizations and to limit the risk of unprofitably large quantities during low demand periods. Fast transport thus provides firms with a real option to smooth demand volatility. The model predicts that the likelihood and extent to which firms employ air shipments is increasing in the volatility of demand they face, decreasing in the air premium they must pay, and increasing in the contemporaneous realization of demand. We confirm all three conjectures using detailed US import data. We provide simple calculations of the option value associated with fast transport and relate it to variation in goods characteristics, technological change, and policies that liberalize trade in air services.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15154.

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Date of creation: Jul 2009
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Publication status: published as Hummels, David L. & Schaur, Georg, 2010. "Hedging price volatility using fast transport," Journal of International Economics, Elsevier, vol. 82(1), pages 15-25, September.
Handle: RePEc:nbr:nberwo:15154

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  1. Hummels, David, 2001. "Time as a Trade Barrier," GTAP Working Papers 1152, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  2. Joshua Aizenman, 2000. "Endogenous Pricing to Market and Financing Costs," NBER Working Papers 7914, National Bureau of Economic Research, Inc.
  3. W. J. Baumol & H. D. Vinod, 1970. "An Inventory Theoretic Model of Freight Transport Demand," Management Science, INFORMS, INFORMS, vol. 16(7), pages 413-421, March.
  4. A. Colin Cameron & Jonah B. Gelbach & Douglas L. Miller & Doug Miller, 2009. "Robust Inference with Multi-way Clustering," Working Papers, University of California, Davis, Department of Economics 98, University of California, Davis, Department of Economics.
  5. Micco, Alejandro & Serebrisky, Tomas, 2006. "Competition regimes and air transport costs: The effects of open skies agreements," Journal of International Economics, Elsevier, Elsevier, vol. 70(1), pages 25-51, September.
  6. Harrigan, James & Venables, Anthony J., 2006. "Timeliness and agglomeration," Journal of Urban Economics, Elsevier, vol. 59(2), pages 300-316, March.
  7. David Hummels, 2007. "Transportation Costs and International Trade in the Second Era of Globalization," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(3), pages 131-154, Summer.
  8. Carolyn L. Evans & James Harrigan, 2005. "Distance, Time, and Specialization: Lean Retailing in General Equilibrium," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 292-313, March.
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Cited by:
  1. Fabling, Richard & Grimes, Arthur & Sanderson, Lynda, 2013. "Any port in a storm: Impacts of new port infrastructure on exporter behaviour," Transportation Research Part E: Logistics and Transportation Review, Elsevier, Elsevier, vol. 49(1), pages 33-47.
  2. David L. Hummels & Georg Schaur, 2013. "Time as a Trade Barrier," American Economic Review, American Economic Association, American Economic Association, vol. 103(7), pages 2935-59, December.
  3. Yang-Ming Chang & Philip Gayle, 2009. "Exports versus FDI: do firms use FDI as a mechanism to smooth demand volatility?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 145(3), pages 447-467, October.
  4. Benjamin Bridgman, 2010. "Market Entry and Trade Weighted Import Costs," BEA Working Papers, Bureau of Economic Analysis 0067, Bureau of Economic Analysis.
  5. Bianka Dettmer & Andreas Freytag & Peter Draper, 2013. "Check-in, departure and arrival times: Air cargo in Southern Africa?," Jena Economic Research Papers, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics 2013-018, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  6. Richard Pomfret & Patricia Sourdin, 2008. "Why Do Trade Costs Vary?," School of Economics Working Papers, University of Adelaide, School of Economics 2008-08, University of Adelaide, School of Economics.
  7. Richard Pomfret & Patricia Sourdin, 2010. "Trade Facilitation And The Measurement Of Trade Costs," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 145-163.
  8. Blyde, Juan & Molina, Danielken, 2013. "Logistics Infrastructure and the International Location of Fragmented Production," MPRA Paper 45749, University Library of Munich, Germany.
  9. Dalton, John, 2013. "A Theory of Just-in-Time and the Growth in Manufacturing Trade," MPRA Paper 48223, University Library of Munich, Germany.
  10. Békès, G. & Fontagné, L. & Murakozy, B. & Vicard, V., 2014. "Shipment frequency of exporters and demand uncertainty," Working papers, Banque de France 479, Banque de France.
  11. David Hummels, 2007. "Transportation Costs and International Trade in the Second Era of Globalization," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(3), pages 131-154, Summer.
  12. Kazunobu Hayakawa & Kiyoyasu Tanaka & Yasushi Ueki, 2013. "Transport Modal Choice by Multinational Firms: Firm-level Evidence from Southeast Asia," International Economic Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 27(4), pages 609-623, December.
  13. Andrei A. Levchenko & Logan T. Lewis & Linda L. Tesar, 2010. "The Role of Financial Factors in the Trade Collapse: A Skeptic's View," Working Papers, Research Seminar in International Economics, University of Michigan 616, Research Seminar in International Economics, University of Michigan.
  14. Steinwender, Claudia, 2013. "Information Frictions and the Law of One Price: “When the States and the Kingdom became United”," CEPREMAP Working Papers (Docweb), CEPREMAP 1314, CEPREMAP.
  15. Lewis, John & Saleheen, Jumana, 2014. "Tailwinds from the East: how has the rising share of imports from emerging markets affected import prices?," Bank of England working papers, Bank of England 506, Bank of England.

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