Islands in trade: Disentangling distance from border effects
Helena Marques and
Maria Gallego Santana
Authors registered in the RePEc Author Service: Maria Santana Gallego ()
No 2014-27, Economics Discussion Papers from Kiel Institute for the World Economy (IfW)
There is a well-established literature on border effects covering trade between regions separated by a land border; however that literature has not so far considered the case of regions separated by a sea border. Whilst the former is typically studied as a political border that affects adjacent regions belonging to different countries and can be reduced by free trade agreements, the latter is a geographical border that affects regions within the same country and cannot be reduced in a similar way. Both types of borders produce similar effects upon trade, calling for a modification of the trade cost function to reflect the fixed cost caused by the need to pay fees and taxes, as well as the time-loss inefficiency, related to the existence of the border. However, in the case of the sea border that fixed cost is due to the use of two modes of transport (road and sea typically). The empirical strategy used to estimate the island effect proceeds in two steps. First an augmented gravity model is estimated for mainland and island regions; then a Blinder-Oaxaca decomposition is applied to the gravity estimation results in order to disentangle the distance and border effects for those regions, net of all other factors controlled for in the gravity estimations. Results show that island regions are at a substantial disadvantage compared to continental regions, which is due more to the lack of adjacency imposed by the sea border rather than to the higher average distance.
Keywords: gravity equation; border effects; panel data; Spain; regional trade (search for similar items in EconPapers)
JEL-codes: F15 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201427
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