Distance and Political Boundaries:Estimating Border Effects under Inequality Constraints

The “border effect” literature ?nds that political boundaries have a large impact on relative prices, implicitly adding several thousands of miles to trade. In this paper we show that the standard empirical speci?cation suffers from selection bias, and propose a new methodology based on quantile regressions. Using a novel data set from Uruguay,we apply our procedure to measure the segmentation introduced by 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; so the city border triples the distance. When our methodology is used, the city border effect becomes insignificant. We further test our method using online prices for the largest supermarket chain in the country, and show that the “online border” is equivalent to the average distance from the online warehouse to the offine stores.