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

Format:Print

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

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.