Working Paper: CEPR ID: DP8730
Authors: Ambarish Chandra; Keith Head; Mariano Tappata
Abstract: National borders, including the easily crossed US-Canada border, have been shown to separate markets and sustain price differences. The resulting arbitrage opportunities vary temporally with the exchange rate and cross-sectionally with travelers' distance to the border. We estimate a structural model of the border crossing decision using data on the location of Canadian crossers and their date of travel. Price differences motivate cross-border travel; a 10% exchange rate appreciation raises the average crosser's welfare by 2.1%. Distance strongly inhibits crossings, with an implied cost of $0.9 per mile. These costs prevent consumers from fully arbitraging price differences, leading to partial segmentation.
Keywords: crossborder travel; market segmentation; real exchange rate; travel costs
JEL Codes: D12; F22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate changes (F31) | consumer welfare (D69) |
| distance (R12) | likelihood of crossing (F55) |
| exchange rate appreciation (F31) | likelihood of crossing (F55) |
| distance (R12) | propensity to cross (F55) |
| exchange rate appreciation (F31) | propensity to cross (F55) |