A Model of Trade with Endogenous Transportation Costs
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.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
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