Spatial Market Integration

Abstract

Markets aggregate demand and supply across actors distributed in space. Well-integrated markets play a fundamental role in ensuring that macrolevel economic policies change the incentives and constraints faced by micro-level decision-makers, in distributing risk and in preserving incentives to adopt improved production technologies. Yet the literature is replete with evidence of forgone arbitrage opportunities in both intra- and inter-national trade. Given limited data and the restrictive assumptions of existing empirical methods, economists still have only a fragile empirical foundation for reaching clear judgements about spatial market integration as a guide for corporate or government policy.