Discussion Paper

No. 2014-30 | July 10, 2014
Effect of Distance on Trade under Slope Heterogeneity and Cross-Correlated Effects
(Published in Special Issue Distance and Border Effects in Economics)


The authors argue that endogeneity of transportation costs needs to be taken into account when estimating the effect of distance on trade. Otherwise, the estimates of the distance effect may be biased and inconsistent. Endogenous transportation can introduce slope heterogeneity and spatial correlation. Both issues can be accommodated with the help of Pesaran’s cross-correlated effects mean-group (CCEMG) estimator. After applying this methodology, the authors uncover significant compression of the distance effect on trade starting from the middle of the 1990s. The trade-reducing effect of long distances becomes statistically indistinguishable from the effect of moderate distances. This compression is not present in the traditional fixed effects estimates. The authors hypothesize that such pattern may be reconciled by changes in shipping technology that disproportionately reduce transportation costs over long distances.

JEL Classification

F1 F6 R4

Cite As

Oleksandr Lugovskyy and Alexandre Skiba (2014). Effect of Distance on Trade under Slope Heterogeneity and Cross-Correlated Effects. Economics Discussion Papers, No 2014-30, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2014-30


Comments and Questions

Anonymous - Invited Reader Comment 1
July 29, 2014 - 12:42

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Anonymous - Referee Report 1
September 02, 2014 - 11:14

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Anonymous - Referee Report 2
September 02, 2014 - 11:17

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