Economic Integration Agreements, Border Effects, and Distance Elasticities in the Gravity Equation

Jeffrey Bergstrand, Mario Larch and Yoto Yotov

No 2013-7, School of Economics Working Paper Series from LeBow College of Business, Drexel University

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, national 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 exogenous unobservable country-pair-specific technological innovations (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 economically plausible and statistically significant estimates of the declining effect of "national 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 show that these results are robust to a battery of sensitivity analyses allowing for phase-ins of agreements, lagged terms-of-trade effects, reverse causality, various estimation techniques, disaggregation, inclusion of intranational trade, and accounting for firm-heterogeneity and country-selection bias.

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)
Pages: 40 pages
Date: 2013-12-05
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
https://drive.google.com/file/d/0BxRDnd8cEKndc1EwW ... zgf0nuDvci52BKYBbSOQ Full text (application/pdf)

Related works:
Journal Article: Economic integration agreements, border effects, and distance elasticities in the gravity equation (2015)
Working Paper: Economic Integation Agreements, Border Effects, and Distance Elasticities in the Gravity Equation (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:drxlwp:2013_007

Access Statistics for this paper

More papers in School of Economics Working Paper Series from LeBow College of Business, Drexel University Contact information at EDIRC.
Bibliographic data for series maintained by Richard C. Barnett ().