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Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints

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  • Fernando Borraz
  • Alberto Cavallo
  • Roberto Rigobon
  • Leandro Zipitría

Abstract

The “border effect” literature finds that political borders have a very large impact on relative prices, implicitly adding several thousands of miles to trade. In this paper we show that the standard empirical specification suffers from selection bias, and propose a new methodology based on quantile regressions. Using a novel data set from Uruguay, we apply our procedure to measure the segmentation introduced by city borders. City borders should matter little for trade. We find that when the standard methodology is used, two supermarkets separated by 10 kilometers across two different cities have the same price dispersion as two supermarkets separated by 30 kilometers within the same city; so the city border triples the distance. When our methodology is used, the city border effect becomes insignificant. We further test our methodology using online prices for the largest supermarket chain in the country, and show that the “online border” is equivalent to the average distance from the online warehouse to each of the offline stores.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18122.

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Date of creation: Jun 2012
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Handle: RePEc:nbr:nberwo:18122

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References

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  1. Oleksiy Kryvtsov & Peter J. Klenow, 2004. "State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation?," Computing in Economics and Finance 2004, Society for Computational Economics 277, Society for Computational Economics.
  2. Mario J. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2009. "The Law of One Price Without the Border: The Role of Distance Versus Sticky Prices," NBER Working Papers 14835, National Bureau of Economic Research, Inc.
  3. Maria Ponomareva & Elie Tamer, 2011. "Misspecification in moment inequality models: back to moment equalities?," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 14(2), pages 186-203, 07.
  4. Russell Hillberry & David Hummels, 2003. "Intranational Home Bias: Some Explanations," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1089-1092, November.
  5. John F. Helliwell & Geneviève Verdier, 2001. "Measuring internal trade distances: a new method applied to estimate provincial border effects in Canada," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 34(4), pages 1024-1041, November.
  6. Volker Nitsch, 2000. "National borders and international trade: evidence from the European Union," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 33(4), pages 1091-1105, November.
  7. Donald W. K. Andrews & Gustavo Soares, 2010. "Inference for Parameters Defined by Moment Inequalities Using Generalized Moment Selection," Econometrica, Econometric Society, Econometric Society, vol. 78(1), pages 119-157, 01.
  8. Yuriy Gorodnichenko & Linda L. Tesar, 2009. "Border Effect or Country Effect? Seattle May Not Be So Far from Vancouver After All," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 219-41, January.
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Cited by:
  1. Yilmazkuday, Demet & Yilmazkuday, Hakan, 2014. "The role of direct flights in trade costs," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 179, Federal Reserve Bank of Dallas.
  2. A. Kerem Cosar & Paul L. E. Grieco & Felix Tintelnot, 2012. "Borders, Geography, and Oligopoly: Evidence from the Wind Turbine Industry," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1228, Koc University-TUSIAD Economic Research Forum.
  3. Alberto Cavallo & Brent Neiman & Roberto Rigobon, 2012. "Currency Unions, Product Introductions, and the Real Exchange Rate," NBER Working Papers 18563, National Bureau of Economic Research, Inc.
  4. Diaz-Lanchas, Jorge & Llano, Carlos & Zofío, José Luis, 2013. "Trade margins, transport cost thresholds and market areas: Municipal freight flows and urban hierarchy," Working Papers in Economic Theory 2013/10, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
  5. Roberto Rigobon & Brent Neiman & Alberto Cavallo, 2013. "Product Introductions, Currency Unions, and the Real Exchange Rate," 2013 Meeting Papers, Society for Economic Dynamics 1357, Society for Economic Dynamics.

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