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Bias in estimating border- and distance-related trade costs: Insights from an oligopoly model

Listed author(s):
  • Coşar, A. Kerem
  • Grieco, Paul L.E.
  • Tintelnot, Felix
Registered author(s):

    Regressions of price differences between locations in different countries without controlling for the local market structure and the location of origin will lead to a biased estimate of the impact of national boundaries. We demonstrate that non-classical measurement error in distance and unaccounted mark-up differences across countries are responsible for these biases. In a quantitative exercise based on our previous work (Coşar et al., 2014), we show that the estimated border effect with price difference regressions overstates the true border effect by a factor of two or more.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0165176514004613
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    Article provided by Elsevier in its journal Economics Letters.

    Volume (Year): 126 (2015)
    Issue (Month): C ()
    Pages: 147-149

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    Handle: RePEc:eee:ecolet:v:126:y:2015:i:c:p:147-149
    DOI: 10.1016/j.econlet.2014.11.034
    Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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    1. 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 219-241, January.
    2. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
    3. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc.
    4. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-1125, December.
    5. Richard Friberg & Mattias Ganslandt, 2008. "Reciprocal Dumping with Product Differentiation," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 942-954, November.
    6. Paul Grieco & A. Kerem Cosar & Felix Tintelnot, 2014. "Borders, Geography and Oligopoly: Evidence from the Wind Turbine Industry," 2014 Meeting Papers 143, Society for Economic Dynamics.
    7. Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February.
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