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A Model of Trade with Endogenous Transportation Costs

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  • Scott Petty

    (University of Minnesota)

  • Jose Asturias

    (University of Minnesota)

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    Abstract

    Fragmented connectivity is a reality of the transportation industry. Two ports need not be connected by a shipping line--in fact, the vast majority of ports in the world are not connected by a line. If this is the case, then any shipment must be off-loaded through at least one additional port adding expenses to the trip. In this paper, we examine the effect connectivity has on trade. We build a model of the transportation industry within a standard Melitz framework. To enter the transportation industry, firms must pay a fixed cost. Transportation firms also enjoy increasing returns to scale. Because of the fixed cost, small markets are less likely to be connected by a shipping line to another country. In addition, small markets that are connected will pay more because of market power of transportation firms and the inability to take advantage of economies of scale. In this model, trade volumes and transportation prices are jointly determined. The data set that we assembled on the route structure of the transportation industry and freight prices suggests that connectivity can significantly affect both the freight price and trade volume. We propose an estimation strategy using the data that we collected for the parameters of the transportation industry.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1095.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:1095

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    1. David Hummels & Volodymyr Lugovskyy, 2006. "Are Matched Partner Trade Statistics a Usable Measure of Transportation Costs?," Review of International Economics, Wiley Blackwell, vol. 14(1), pages 69-86, 02.
    2. Spiros Bougheas & Panicos Demetriades & Edgar Morgenroth, 1996. "Infrastructure, Transport Costs and Trade," Keele Department of Economics Discussion Papers (1995-2001) 96/7, Department of Economics, Keele University.
    3. Jean-François Brun & Céline Carrère & Patrick Guillaumont & Jaime de Melo, 2005. "Has Distance Died? Evidence from a Panel Gravity Model," World Bank Economic Review, World Bank Group, vol. 19(1), pages 99-120.
    4. Bruce A. Blonigen & Wesley Wilson, 2006. "New Measures of Port Efficiency Using International Trade Data," NBER Working Papers 12052, National Bureau of Economic Research, Inc.
    5. University of Iowa & Michael E. Waugh, 2007. "International Trade and Income Differences," 2007 Meeting Papers 492, Society for Economic Dynamics.
    6. David S. Jacks & Christopher M. Meissner & Dennis Novy, 2008. "Trade Costs, 1870-2000," American Economic Review, American Economic Association, vol. 98(2), pages 529-34, May.
    7. Berthelon, Matias & Freund, Caroline, 2008. "On the conservation of distance in international trade," Journal of International Economics, Elsevier, vol. 75(2), pages 310-320, July.
    8. Francois, Joseph & Wooton, Ian, 2000. "Trade in International Transport Services: The Role of Competition," CEPR Discussion Papers 2377, C.E.P.R. Discussion Papers.
    9. David Hummels & Volodymyr Lugovskyy & Alexandre Skiba, 2007. "The Trade Reducing Effects of Market Power in International Shipping," NBER Working Papers 12914, National Bureau of Economic Research, Inc.
    10. Wilmsmeier, Gordon & Hoffmann, Jan & Sanchez, Ricardo J., 2006. "The Impact of Port Characteristics on International Maritime Transport Costs," Research in Transportation Economics, Elsevier, vol. 16(1), pages 117-140, January.
    11. David Hummels, 2007. "Transportation Costs and International Trade in the Second Era of Globalization," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 131-154, Summer.
    12. Mauricio Mesquita Moreira & Christian Volpe Martincus & Juan S. Blyde, . "Unclogging the Arteries: The Impact of Transport Costs on Latin American and Caribbean Trade," IDB Publications 13138, Inter-American Development Bank.
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