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Trade costs in empirical New Economic Geography

Author

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  • Maarten Bosker
  • Harry Garretsen
Abstract
Trade costs are a crucial element of New Economic Geography (NEG) models. Without trade costs there is no role for geography. In empirical NEG studies the unavailability of direct trade cost data calls for the need to approximate these trade costs by introducing a trade cost function. In doing so, hardly any attention is paid to the (implicit) assumptions and empirical consequences of the particular trade cost function used. Based on a meta‐analysis of NEG market access studies as well as on the results of estimating the NEG wage equation for a uniform sample while using different trade costs functions, we show that the relevance of the key NEG variable, market access, depends nontrivially on the choice of trade cost function. Next, we propose an alternative way to approximate trade costs that does not require the specification of a trade cost function, the so called implied trade costs approach. Overall, our results stress that the specification of trade costs can matter a lot for the conclusions reached in any empirical NEG study. We therefore call for a much more careful treatment of trade costs in future empirical NEG studies. Resumen Los costos de comercio son un elemento crucial de los modelos de la Nueva Geografía Económica (NEG, siglas en inglés). Sin los costos de comercio no hay un rol para la geografía. En estudios empíricos de NEG, la falta de disponibilidad de datos de costos directos de comercio directo crea la necesidad de estimar estos costos de comercio mediante la introducción de una función de costos de comercio. Al hacer esto, apenas se presta atención a las suposiciones (implícitas) y consecuencias empíricas de la función de costo utilizada en particular. Basado en un meta análisis de estudios de acceso de mercado de NEG, así como en los resultados de estimar la ecuación salarial de NEG para una muestra uniforme al tiempo que utilizando diferentes funciones de costos de comercio, mostramos que la relevancia de la variable clave para la NEG, acceso a mercados, depende considerablemente de la elección de la función de costos de comercio. A continuación, proponemos una alternativa para estimar costos de comercio que no requiere especificar una función de costos de comercio, el llamado enfoque de costos de comercio implícitos. En resumen, nuestros resultados insisten en que el especificar los costos de comercio puede tener mucha importancia para las conclusiones alcanzadas en cualquier estudio empírico de NEG. Pedimos por tanto un tratamiento mucho más cuidadoso de los costos de comercio en futuros estudios empíricos de NEG.

Suggested Citation

  • Maarten Bosker & Harry Garretsen, 2010. "Trade costs in empirical New Economic Geography," Papers in Regional Science, Wiley Blackwell, vol. 89(3), pages 485-511, August.
    • Handle: RePEc:bla:presci:v:89:y:2010:i:3:p:485-511
    DOI: 10.1111/j.1435-5957.2010.00314.x
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