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Coordination cost and the distance puzzle

  • Sandrine Noblet

    ()

  • Antoine Belgodere

The distance puzzle has been wildly discussed in the literature since Leamer and Levinsohn (1995) shed the light on it. This puzzle simply says that “the world is not getting smaller”: distance still matters to account for trade. This is reflected in a decreasing distance of trade (DOT), or in a stable or increasing (negative) elasticity of trade with respect to distance (Disdier and head, 2008). Several explanations of this puzzle have been emphasized in the empirical International Economics literature. Duranton and Storper (2008) contribute to this issue in offering a full theoretical framework to account for this puzzle. They explain that an improvement in transport technology can increase the transport costs, because it creates an incentive to trade higher quality goods. Our paper proposes a new theoretical explanation of this puzzle. This explanation shares with Duranton and Storper's two important characteristics: i) there is a non monotonic relationship between transport cost and trade cost. ii) this phenomenon is due to contract incompleteness. However, the mechanism that we underline is quite different: in our model, based on a Dixit-Stiglitz increasing return to scale technology, a fall in transport cost increases the international division of labour. It follows that input-output linkages require a higher level of coordination. Such a coordination is easier between neighbors than between very distant countries. As a result, trade increases with all partners, but more quickly for neighbors than for distant countries.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa10p756.

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Date of creation: Sep 2011
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Handle: RePEc:wiw:wiwrsa:ersa10p756
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  1. Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers 95-05, Michigan - Center for Research on Economic & Social Theory.
  2. Rikhil Bhavnani & Natalia T. Tamirisa & Arvind Subramanian & David T. Coe, 2002. "The Missing Globalization Puzzle," IMF Working Papers 02/171, International Monetary Fund.
  3. Keith Acheson, 2011. "Globalization," Chapters, in: A Handbook of Cultural Economics, Second Edition, chapter 31 Edward Elgar.
    • Keith Acheson, 2003. "Globalization," Chapters, in: A Handbook of Cultural Economics, chapter 31 Edward Elgar.
  4. Claudia M. Buch & Jörn Kleinert & Farid Toubal, 2003. "The Distance Puzzle: On the Interpretation of the Distance Coefficient in Gravity Equations," Kiel Working Papers 1159, Kiel Institute for the World Economy.
  5. Anne-Célia Disdier & Keith Head, 2008. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 37-48, February.
  6. Sebastian Krautheim, 2007. "Gravity and Information: Heterogeneous Firms, Exporter Networks and the 'Distance Puzzle'," Economics Working Papers ECO2007/51, European University Institute.
  7. Fink, Carsten & Mattoo, Aaditya & Neagu, Ileana Cristina, 2002. "Assessing the impact of communication costs on international trade," Policy Research Working Paper Series 2929, The World Bank.
  8. David T Coe & Arvind Subramanian & Natalia T Tamirisa, 2007. "The Missing Globalization Puzzle: Evidence of the Declining Importance of Distance," IMF Staff Papers, Palgrave Macmillan, vol. 54(1), pages 34-58, May.
  9. Gilles Duranton & Michael Storper, 2005. "Rising Trade Costs? Agglomeration and Trade with Endogenous Transaction Costs," CEP Discussion Papers dp0683, Centre for Economic Performance, LSE.
  10. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  11. Hummels, David, 2001. "Time as a Trade Barrier," GTAP Working Papers 1152, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  12. Jean-François BRUN & Céline CARRERE & Patrick GUILLAUMONT & Jaime MELO DE, 2002. "Has Distance Died? Evidence from a Panel Gravity Model," Working Papers 200215, CERDI.
  13. 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.
  14. Edward E. Leamer & James Levinsohn, 1994. "International Trade Theory: The Evidence," NBER Working Papers 4940, National Bureau of Economic Research, Inc.
  15. Lionel Fontagne & Soledad Zignago, 2007. "A Re-evaluation of the Impact of Regional Agreements on Trade Patterns," Economie Internationale, CEPII research center, issue 109, pages 31-51.
  16. Cletus C. Coughlin, 2004. "The increasing importance of proximity for exports from U.S. states," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 1-18.
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