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Communication Costs, Direct Flights and International Trade

Author

Listed:
  • Taiji Furusawa
  • Chang Sun
  • Heiwai Tang
  • Jiaxu Zhang

Abstract

We build a general equilibrium model of endogenous communication, quality control and trade. We derive a structural gravity equation from the model and show that exogenous communication costs raise the costs of quality control and have a larger impact on products with a lower elasticity of substitution. In our empirical application, we estimate the impact of direct flight connectedness on communication costs using the gravity equation. We overcome the identification challenge using an instrumental variable constructed based on the discontinuity of direct flights at around 6,000-mile distance due to air travel regulations. We find that air connectedness increases trade, especially for products with a low elasticity. We combine the empirical estimates and our equilibrium model to quantify the aggregate impact of air connectedness.

Suggested Citation

  • Taiji Furusawa & Chang Sun & Heiwai Tang & Jiaxu Zhang, 2024. "Communication Costs, Direct Flights and International Trade," CESifo Working Paper Series 11364, CESifo.
  • Handle: RePEc:ces:ceswps:_11364
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    References listed on IDEAS

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    1. Blonigen, Bruce A. & Cristea, Anca D., 2015. "Air service and urban growth: Evidence from a quasi-natural policy experiment," Journal of Urban Economics, Elsevier, vol. 86(C), pages 128-146.
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    More about this item

    Keywords

    international direct flights; elasticity of substitution; face-to-face communication;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • R40 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - General

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