A trade hierarchy of cities based on transport cost thresholds

Empirical evidence is lagging behind in explaining trade agglomerations in short distances. Departing from a novel micro-database on road freight shipments within Spain for the period 2003-2007, we decompose cities (municipal) trade flows into the extensive and intensive margins to assess trade frictions and trade concentration by way of a unique generalized transport cost measure and three internal borders, NUTS-5 (municipal), NUTS-3 (provincial) and NUTS-2 (regional). We discover a stark accumulation of trade flows up to a transport cost value of e189 (170km approx.) and conclude that this high density is not explained by the existence of administrative borders effects but to significant changes in the trade-to-transport costs relationship. To support this hypothesis, we propose and adopt an endogenous Chow test to identify significant thresholds at which trade flows change structurally with distance. These breakpoints allow us to split the sample when controlling for internal borders, and define trade market areas corresponding to specific transport costs values that consistently portrait an urban hierarchical system of cities, thereby providing clear evidence of the predictions made by the central place theory.