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Economic integration agreements, border effects, and distance elasticities in the gravity equation

Jeffrey Bergstrand, Mario Larch and Yoto Yotov

European Economic Review, 2015, vol. 78, issue C, 307-327

Abstract: Using a novel common econometric specification, we examine the measurement of three important effects in international trade that historically have been addressed largely separately: the (partial) effects on trade of economic integration agreements, international borders, and bilateral distance. First, recent studies focusing on precise and unbiased estimates of effects of economic integration agreements (EIAs) on members׳ trade may be biased upward owing to inadequate control for time-varying exogenous unobservable country-pair-specific changes in bilateral export costs (possibly decreasing the costs of international relative to intranational trade); we find evidence of this bias using a properly specified gravity equation. Second, our novel methodology yields statistically significant estimates of the declining effect of “international borders” on world trade, now accounting for endogenous EIA formations and unobserved country-pair heterogeneity in initial levels. Third, we confirm recent evidence providing a solution to the “distance-elasticity puzzle,” but show that these estimates of the declining effect of distance on international trade are biased upward by not accounting for endogenous EIA formations and unobserved country-pair heterogeneity. We conclude our study with numerical general equilibrium comparative statics illustrating a substantive difference on trade effects of EIAs with and without allowance for the declining effects of international borders on world trade.

Keywords: International trade; Economic integration agreements; Gravity equations (search for similar items in EconPapers)
JEL-codes: F13 F14 F15 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (261)

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Related works:
Working Paper: Economic Integation Agreements, Border Effects, and Distance Elasticities in the Gravity Equation (2013) Downloads
Working Paper: Economic Integration Agreements, Border Effects, and Distance Elasticities in the Gravity Equation (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:78:y:2015:i:c:p:307-327

DOI: 10.1016/j.euroecorev.2015.06.003

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