The Gains from Economic Integration

Sevi Rodríguez Mora () and David Comerford

No 569, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper measures the effect of sharing a national state on the degree of trade integration. We call the causal effect of this political integration the economic integration - this is the additional trade integration gained by entities which come together to form a country rather being independent countries. The existence of very large border effects, even within the European Union, is well known, and is a consequence of this aforementioned economic integration achieved within national states. Nevertheless, these border effects are bound to overestimate the gains from sharing a state. This is because places which share larger affinities are more likely to both trade with each other and to select into sharing a state. This endogeneity therefore means that estimates of the average border effect overstate the reductions in trade frictions achieved by sharing a state. In this paper, we propose an alternative approach. We identify marginal regions (regions which could conceivably be independent countries by themselves) and marginal countries (countries that are the closest trading partner in the data to the country to which that marginal regions belong). We propose that the gap in trade frictions between these marginal regions and marginal countries is a much better estimate to the causal impact of state sharing. Despite controlling for selection bias, we find that the gains from economic integration are still substantial: it is about one third of the total gains from trade.

Date: 2015
New Economics Papers: this item is included in nep-int
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Related works:
Journal Article: The gains from economic integration (2019)
Working Paper: The gains from economic integration (2017)
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