Mismeasurement of Distance Effects: The Role of Internal Location of Production
Florida International University
December 1, 2013
The estimated effects of distance in empirical international trade regressions are unrealistically high. This paper shows analytically and proves empirically that ignoring the internal location of production (of international exports), which leads to the mismeasurement of distance effects, is a possible explanation. It is empirically shown that ignoring the internal location of production leads to an overestimation of distance effects by about twofold. This overestimation can mostly be attributed to the mismeasurement of the distance elasticity of trade costs and ignoring preferences of individuals in the destination countries when aggregate-level data are used. The results are robust to the consideration of alternative estimation methodologies and data sets.
Number of Pages in PDF File: 33
Keywords: Elasticity of Substitution, Distance Elasticity of Trade, State Exports, the United States
JEL Classification: F12, F13, F14working papers series
Date posted: July 9, 2008 ; Last revised: December 10, 2013
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