Mismeasurement of Distance Effects: The Role of Internal Location of Production
Florida International University (FIU) - Department of Economics
April 14, 2014
The estimated effects of distance in empirical international trade regressions are unrealistically high. Using state-and-sector level U.S. exports data, this paper shows analytically and proves empirically that ignoring the internal location of production (of international exports), which leads to the overestimation of distance effects by about twofold, is a possible explanation. This overestimation is mostly attributed to the mismeasurement of the distance elasticity of trade costs when internal locations of production are ignored. A corrective distance index is proposed to avoid such mismeasurements and is shown to work well for the median sector. The results are robust to the consideration of alternative estimation methodologies and data sets.
Number of Pages in PDF File: 35
Keywords: Elasticity of Substitution, Distance Elasticity of Trade, State Exports, the United States
JEL Classification: F12, F13, F14
Date posted: July 9, 2008 ; Last revised: April 15, 2014