Distance and Political Boundaries: Estimating Border Effects Under Inequality Constraints

57 Pages Posted: 3 Jun 2012 Last revised: 9 Jul 2023

See all articles by Fernando Borraz

Fernando Borraz

Universidad de la Republica - Faculty of Social Sciences; Central Bank of Uruguay

Alberto Cavallo

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Leandro Zipitria

dECON - FCS - UdelaR

Date Written: June 2012

Abstract

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.

Suggested Citation

Borraz, Fernando and Borraz, Fernando and Cavallo, Alberto and Rigobon, Roberto and Zipitria, Leandro, Distance and Political Boundaries: Estimating Border Effects Under Inequality Constraints (June 2012). NBER Working Paper No. w18122, Available at SSRN: https://ssrn.com/abstract=2073162

Fernando Borraz (Contact Author)

Central Bank of Uruguay ( email )

Diagonal Fabini 777
Montevideo, CP 11100
Uruguay

Universidad de la Republica - Faculty of Social Sciences ( email )

CP 11200 Montevideo
Uruguay

Alberto Cavallo

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-447
Cambridge, MA 02142
United States
617-258-8374 (Phone)
617-258-6855 (Fax)

Leandro Zipitria

dECON - FCS - UdelaR ( email )

Constituyente 1502
Montevideo, CP 11620
Uruguay

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