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Mismeasurement of Distance Effects: The Role of Internal Location of Production
Author(s) -
Yilmazkuday Hakan
Publication year - 2014
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12151
Subject(s) - economics , econometrics , production (economics) , estimation , bilateral trade , work (physics) , elasticity (physics) , index (typography) , international trade , microeconomics , computer science , mechanical engineering , materials science , management , world wide web , political science , law , china , composite material , engineering
The estimated effects of distance in empirical international trade regressions are unrealistically high. Using state‐and‐sector level US exports data, this paper shows analytically and proves empirically that ignoring the internal location of production (of international exports), which leads to the overestimation of distance effects by about twofold, is a possible explanation. This overestimation is mostly attributed to the mismeasurement of the distance elasticity of trade costs when internal locations of production are ignored. A corrective distance index is proposed to avoid such mismeasurements and is shown to work well for the median sector. The results are robust to the consideration of alternative estimation methodologies and data sets.