ESTIMATING BORDER EFFECTS: THE IMPACT OF SPATIAL AGGREGATION

Abstract

Trade data are typically aggregated across space. In this article, we investigate the sensitivity of gravity estimation to spatial aggregation. We build a model in which micro regions are aggregated into macro regions. We then apply the model to the large literature on border effects in domestic and international trade. Our theory shows that aggregation leads to border effect heterogeneity. Larger regions and countries are systematically associated with smaller border effects. We test our theory with aggregate and industry-level trade flows for U.S. states. Our results confirm the model's predictions, with strong heterogeneity patterns.