Heterogeneity and distance puzzle

Guillaume Daudin (1) , Elizaveta Archanskaia (1)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

This paper shows that reduced heterogeneity of exporter-specific goods can provide a direct explanation of the distance puzzle. Using COMTRADE 4-digit bilateral trade data we find that the elasticity of trade to distance has increased by 8% from 1962 to 2009. Theoretical foundations of the gravity equation indicate that the distance coefficient is the product of the elasticity of trade costs to distance and a measure of heterogeneity, e.g. the substitution elasticity between exporter-specific goods in the Armington framework. This parameter has increased by 13% from 1962 to 2009. The evolution of the distance coefficient is thus compatible with a 4% reduction in the elasticity of trade costs to distance.

Keywords: gravity equation; distance puzzle; trade elasticity; trade costs

Domains: Economics and Finance

Guillaume Daudin, Elizaveta Archanskaia. Heterogeneity and distance puzzle. 2012. ⟨hal-01073683⟩