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The Tip of the Iceberg: A Quantitative Framework for Estimating Trade Costs

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  • Alfonso A. Irarrazabal
  • Andreas Moxnes
  • Luca David Opromolla

Abstract

International economics has overwhelmingly relied on Samuelson's (1954) assumption that trade costs are proportional to value. We develop a quantitative analytical framework that features both additive and multiplicative (iceberg) trade costs, building on a model of international trade with heterogeneous firms and demand heterogeneity. We structurally estimate the magnitude of additive trade costs, for every product and destination available in our firm-level data of Norwegian exporters. Identification is aided by the theoretical finding that the elasticity of demand to producer price is dampened, in absolute value, when prices are low, and this mechanism is magnified when additive trade costs are high. This magnification mechanism becomes useful in the subsequent econometric analysis. Estimated additive trade costs are substantial. On average, additive costs are 33 percent, expressed relative to the median price. This leads us to reject the pure iceberg cost assumption. We assess the importance of these costs in shaping global trade flows. Our micro estimates of additive trade costs explain most of the geographical variation in aggregate trade. An implication of our work is that inferring trade costs from standard gravity models suffers from specification bias, since these models assume away the role of additive trade costs.

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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201125.

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Date of creation: 2011
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Handle: RePEc:ptu:wpaper:w201125

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Cited by:
  1. Marc J. Melitz & Stephen J. Redding, 2012. "Heterogeneous Firms and Trade," NBER Working Papers 18652, National Bureau of Economic Research, Inc.
  2. Andreas Kropf & Philip Ulrich Sauré, 2012. "Fixed Costs per Shipment," Working Papers 2012-13, Swiss National Bank.
  3. Peters, Katrin & Schnitzer, Monika, 2012. "Trade liberalization and credit constraints: Why opening up may fail to promote convergence," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 380, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Luis Castro & Ben Li & Keith E. Maskus & Yiqing Xie, 2014. "Fixed Export Costs and Export Behavior," CESifo Working Paper Series 4697, CESifo Group Munich.
  5. Amandine AUBRY & Michal BURZYŃSKI, 2013. "The Welfare Impact of Global Migration in the OECD Countries," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2013035, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  6. Paul S. Segerstrom & Ignat Stepanok, 2012. "Learning How to Export," Kiel Working Papers 1801, Kiel Institute for the World Economy.

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