Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints.

Fernando Borraz, Alberto Cavallo, Roberto Rigobon, Leandro Zipitría

NBER Working Paper No. 18122
Issued in June 2012, Revised in August 2014
NBER Program(s):International Finance and Macroeconomics, International Trade and Investment

The "border effect" literature finds that political borders have a very large impact on relative prices, implicitly adding several thousands of miles to trade. In this paper we show that the standard empirical specification suffers from selection bias, and propose a new methodology based on quantile regressions. Using a novel data set from Uruguay, we apply our procedure to measure the segmentation introduced by city borders. City borders should matter little for trade. We find that when the standard methodology is used, two supermarkets separated by 10 kilometers across two different cities have the same price dispersion as two supermarkets separated by 30 kilometers within the same city; so the city border triples the distance. When our methodology is used, the city border effect becomes insignificant. We further test our methodology using online prices for the largest supermarket chain in the country, and show that the "online border" is equivalent to the average distance from the online warehouse to each of the offline stores.

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Document Object Identifier (DOI): 10.3386/w18122

Published: Fernando Borraz & Alberto Cavallo & Roberto Rigobon & Leandro Zipitria, 2016. "Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints," International Journal of Finance & Economics, vol 21(1), pages 3-35. citation courtesy of

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