Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints

Fernando  Borraz; Alberto  Cavallo; Roberto  Rigobon; Leandro  Zipitria

Article | International Journal of Finance & Economics

Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints

by Fernando Borraz, Alberto Cavallo, Roberto Rigobon and Leandro Zipitria

Abstract

The border effects literature finds that political boundaries have a large impact on relative prices across locations. In this paper we show that the standard empirical specification suffers from selection bias, and propose a new methodology based on binned-quantile regressions. We use a novel micro-price dataset from Uruguay and focus on city borders. We find that when the standard methodology is used, two supermarkets separated by 10 kilometers across two different cities have the same price dispersion as two supermarkets separated by 30 kilometers within the same city, implying that crossing a city border is equivalent to tripling the distance. By contrast, when upper quantiles are used the city border effect disappears. These findings imply that transport costs have been systematically underestimated by previous literature. Our methodology can be applied to measure any kind of border effect. We illustrate this in the context of online-offine price dispersion to measure an online border effect in the city of Montevideo.

Keywords: border effects; prices;

Format: Print

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Citation:

Borraz, Fernando, Alberto Cavallo, Roberto Rigobon, and Leandro Zipitria. "Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints." International Journal of Finance & Economics 21, no. 1 (January 2016): 3–35.

Case | HBS Case Collection | May 2020 (Revised June 2020)

The Coronavirus (COVID-19) Pandemic and the Global Economy (A)

Alberto Cavallo and Christian Godwin

In April 2020, the world struggled to contain the exponential escalation of the coronavirus (COVID-19) pandemic. Dozens of countries had imposed restrictions on travel, work, and social gatherings. A large share of the global population was under lockdowns and unprecedented supply and demand disruptions crippled the economy. In response, central banks announced massive lending programs to avoid a financial meltdown, and governments were launching unprecedented fiscal packages designed to contain the collapse. In a matter of weeks, the pandemic turned into one of the worst global economic crises since the Great Depression. As governments struggled to make policy decisions, uncertainty and tensions were rising. How to balance the public health and economic concerns? What would be the economic and political consequences of the policy response? Was this the end of globalization, or the beginning of a new era of international cooperation? The only certainty was that some of the hardest choices still lay ahead.

Keywords: Demand and Consumers; Supply and Industry; Finance; Central Banking; Financial Markets; International Finance; Globalization; Government and Politics; Health Pandemics; Decision Making; Macroeconomics; Employment; Crisis Management; Supply Chain; Risk and Uncertainty; Air Transportation Industry; Banking Industry; Consumer Products Industry; Employment Industry; Financial Services Industry; Food and Beverage Industry; Health Industry; Medical Devices and Supplies Industry; Pharmaceutical Industry; Public Administration Industry; Retail Industry; Service Industry; Shipping Industry; Tourism Industry; Travel Industry; Asia; China; Europe; Latin America; Africa; United States;

Citation:

Cavallo, Alberto, and Christian Godwin. "The Coronavirus (COVID-19) Pandemic and the Global Economy (A)." Harvard Business School Case 720-031, May 2020. (Revised June 2020.) View Details

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The Covid-19 Pandemic has led to changes in consumer expenditure patterns that can introduce significant bias in the measurement of CPI inflation. I use data collected from credit and debit transactions in the US to update the official basket weights. I find that the Covid inflation rate is higher for both headline and core CPIs, particularly for low-income households. I find similar results in 12 of 17 additional countries. The difference is growing over time as consumers spend relatively more on food and categories with rising inflation, and relatively less on transportation and categories experiencing significant deflation.

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Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints

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