Estimating Border Effects: The Impact of Spatial Aggregation

57 Pages Posted: 18 Apr 2016

See all articles by Cletus C. Coughlin

Cletus C. Coughlin

Federal Reserve Bank of St. Louis - Research Division

Dennis Novy

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR); Centre for Economic Performance (CEP); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 3 versions of this paper

Date Written: April 2016

Abstract

Trade data are typically reported at the level of regions or countries and are therefore aggregates across space. In this paper, we investigate the sensitivity of standard gravity estimation to spatial aggregation. We build a model in which initially symmetric micro regions are combined to form aggregated macro regions. We then apply the model to the large literature on border effects in domestic and international trade. Our theory shows that larger countries are systematically associated with smaller border effects. The reason is that due to spatial frictions, aggregation across space increases the relative cost of trading within borders. The cost of trading across borders therefore appears relatively smaller. This mechanism leads to border effect heterogeneity and is independent of multilateral resistance effects in general equilibrium. Even if no border frictions exist at the micro level, gravity estimation on aggregate data can still produce large border effects. We test our theory on domestic and international trade flows at the level of U.S. states. Our results confirm the model's predictions, with quantitatively large effects.

Keywords: Borders, Geography, Gravity, Heterogeneity, Home Bias, Modifiable Areal Unit Problem (MAUP), Spatial Attenuation, Trade Costs

JEL Classification: F10, F15, R12

Suggested Citation

Coughlin, Cletus C. and Novy, Dennis, Estimating Border Effects: The Impact of Spatial Aggregation (April 2016). CEPR Discussion Paper No. DP11226. Available at SSRN: https://ssrn.com/abstract=2766554

Cletus C. Coughlin (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Dennis Novy

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 (0) 2476150046 (Phone)

HOME PAGE: http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/novy/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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