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Illusory border effects: distance mismeasurement inflates estimates of home bias in trade

Author

Listed:
  • Keith Head

    (Sauder - Sauder School of Business [British Columbia] - UBC - University of British Columbia [Canada])

  • Thierry Mayer

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

The measured effect of national borders on trade seems too large to be explained by the apparently small border-related trade barriers. This puzzle was first presented by McCallum (1995) and has gone on to spawn a large and growing literature on so-called border effects. We argue in this paper that, because distances are always mismeasured in the existing literature, the border effects may have been mismeasured in a way that leads to a systematic overstatement. Our goal here is to develop a correct measure of distance that would be consistent for international as well as intra-national trade flows. We show how use of the existing methods for calculating distance leads to "illusory" border and adjacency effects. We then apply our methods to data on interstate trade in the United States and inter-member trade in the European Union. We find that our new distance measure reduces the estimated border and adjacency effects but does not eliminate them. Thus, while we do not solve the border effect puzzle, we do show a way to shrink it.

Suggested Citation

  • Keith Head & Thierry Mayer, 2010. "Illusory border effects: distance mismeasurement inflates estimates of home bias in trade," Post-Print hal-03397888, HAL.
    • Handle: RePEc:hal:journl:hal-03397888
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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