How wide is the Border across U.S. States?
One sentence summary: Crossing a U.S. state border has the same effects on price dispersion as having 3,344 miles across U.S. cities.
The corresponding paper by Hakan Yilmazkuday has been published at Letters in Spatial and Resource Sciences.
Abstract
This paper focuses on the implications of the deviations from the Law-of-One-Price on the implied widths of borders across the U.S. states through using good-level price data from the U.S. cities. There is evidence for a positive and significant border effect across the states of the U.S. in terms of good-level price dispersion. Distance equivalent of the state border effect is, on average, about 3,344 miles, independent of the price dispersion measure used.
Non-technical Summary
Understanding intranational price dispersion is essential for understanding international border effects. In this context, this paper investigates intranational price dispersion by considering possible border effects across states of the U.S. through using city- and good-level price data.
We use the time variation in prices as a measure of price dispersion in the analysis. When prices of a specific good obtained from two cities located in two different states are considered as a pair of relative prices, there is a possible effect of a state border; otherwise, there is not. Compared to international border effects, although it is less obvious to have a border effect across the states of the U.S., it is still possible and important to have them through state-specific costs or pricing policies of the firms (due to policy-driven differences across states such as infrastructure, land prices), state-level sales taxes, or geographical factors (e.g., crossing a bridge on a river separating two states). Moreover, many states have individual benefit agreements (such as tax treatments) with firms that may also affect their pricing strategies. Such possible differences are investigated in this paper through a price-dispersion analysis.
In terms of the deviations from the Law-of-One-Price, this paper shows that state borders have positive and significant effects on price dispersion across the U.S. cities. Using 48 good-level price data from 52 cities from the U.S., it has been shown that, on average, distance equivalent of the state border effect across the U.S. cities is about 3,344 miles.
Since the city- and good-level price data are actual U.S. dollar values of goods rather than price indices, this paper can distinguish between volatilities in relative prices and relative inflation rates. Interestingly, when the pooled sample of goods is considered, the average estimated state border effect is the same, independent of the price dispersion measure used. The results of this paper should be interpreted with caution: (i) the implied distances calculated in this paper represent the average state border rather than representing any individual state border, (ii) there may well be measurement errors in the good-level prices.