Trade Costs and Provincial Heterogeneity in Italy

We test the hypothesis that higher economic development is associated with lower trade costs. Using different methods to control for multilateral resistance, we apply two alternative gravity equations (GE). In the first, we estimate total exports from 103 Italian provinces to 188 countries over the period 1995-2004. In the second, we estimate sectoral exports and then construct provincial trade cost elasticities. Italian provinces are heterogeneous with respect to trade costs. The two versions of GE are qualitatively the same but quantitatively different suggesting that other factors than trade costs are at play, possibly agglomeration externalities.