Bias in Estimating Border and Distance-related Trade Costs: Insights from an Oligopoly Model

Abstract

Regressions of price differences between locations in different countries without controlling for the local market structure and the location of origin of the product will lead to a biased estimate of the impact of national boundaries. We demonstrate that non-classical measurement error in distance and unaccounted mark-up differences across countries are responsible for these biases. In a quantitative exercise based on our previous work (Cosar et al., 2014), we show that the estimated border effect with price difference regressions overstates the true border effect by a factor of two or more.

Publication
Economics Letters, 126: 147-149
Date