Working Paper: NBER ID: w14834
Authors: Mario J. Crucini; Hakan Yilmazkuday
Abstract: We develop a model of cities each inhabited by two agents, one specializing in manufacturing, the other in distribution. The distribution sector represents the physical transformation of all internationally traded goods from the factory gate to the final consumer. Using a panel of micro-prices at the city level, we decompose the long-run variance of LOP deviations into the fraction due to distribution costs, trade costs and a residual. For the median good, trade costs account for 50 percent of the variance, distribution costs account for 10 percent with 40 percent of the variance unexplained. Since the sample of items in the data are heavily skewed toward traded goods, we also decompose the variance based on the median good on an expenditure-weighted basis. Now the tables turn, with distribution costs accounting for 43 percent, trade costs 36 percent and 21 percent of the variance unexplained.
Keywords: International Cities; Real Exchange Rates; Distribution Costs; Trade Costs
JEL Codes: F0; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade costs (F19) | long-run price deviations (LOP deviations) (E30) |
| distribution costs (D39) | long-run price deviations (LOP deviations) (E30) |
| distribution margin (D39) | geographic price dispersion (R12) |
| distribution costs (D39) | price dispersion (L11) |
| trade costs (F19) | price dispersion (L11) |
| distribution costs and trade costs (F10) | price dispersion (L11) |