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The final frontier? Border effects and German regional wages

  • Brakman, Steven
  • Garretsen, Harry
  • Schramm, Marc

Recent studies of border effects have focused on the intra-country and inter-country comparison of trade flows. It is found that borders have a negative impact on the size of cross-border trade. In order to estimate border effects on a regional level one needs not only data on inter-country but also on intra-country trade. For many countries (regional) data on intra-country trade are simply lacking, which makes an analysis of border effects and border regions cumbersome. In this paper we take a different approach to measure the impact of borders. We estimate a market potential function for German regional wages and by analysing whether German border regions can be distinguished from the other regions in terms of their wages. We use a market potential function because its basic idea (regional wages fall the further one moves away from economic centers) can be grounded on different trade theories and also because the resulting wage equation is related to border effect studies based on trade flows. We use a data set for 441 German districts for the years 1992 and 1995. In general, we find some evidence that is consistent with the existence of border effects but this evidence is probably better looked upon as an indication of a strong localisation of demand spillovers on regional wages in general. Even though border effects can not be ruled out, the overriding outcome is that of a strong localization of demand spill-overs for all German regions.

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Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 197.

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Date of creation: 2002
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Handle: RePEc:zbw:hwwadp:26233
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  1. Gordon H. Hanson, 1998. "Market Potential, Increasing Returns, and Geographic Concentration," NBER Working Papers 6429, National Bureau of Economic Research, Inc.
  2. Niebuhr, Annekatrin & Stiller, Silvia, 2002. "Integration effects in border regions - a survey of economic theory and empirical studies," ERSA conference papers ersa02p066, European Regional Science Association.
  3. Ciccone, Antonio, 2002. "Agglomeration effects in Europe," European Economic Review, Elsevier, vol. 46(2), pages 213-227, February.
  4. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  5. J.Peter Neary, 2001. "Of Hype and Hyperbolas: Introducing the New Economic Geography," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 536-561, June.
  6. Michael Roos, . "Wages and Market Potential in Germany," Discussion Papers in Economics 00_09, University of Dortmund, Department of Economics.
  7. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
  8. Thierry Mayer & Pierre-Philippe Combes & Miren Lafourcade, 2004. "Can Business and Social Networks Explain the Border Effect Puzzle?," Econometric Society 2004 North American Winter Meetings 330, Econometric Society.
  9. Holger C. Wolf, 2000. "Intranational Home Bias In Trade," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 555-563, November.
  10. Keith Head & John Ries, 2001. "Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade," American Economic Review, American Economic Association, vol. 91(4), pages 858-876, September.
  11. Paul Krugman, 1998. "Space: The Final Frontier," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 161-174, Spring.
  12. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  13. van Houtum, H.J., 1998. "The development of cross-border economic relations," Other publications TiSEM 9f9d10bf-9df7-43f8-a3e5-f, School of Economics and Management.
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