Aggregation bias, compositional change, and the border effect

Borders affect the composition, not only the level, of interregional trade. In disaggregated U.S. Commodity Flow data, border effects vary substantially across commodities. Substantial border-induced compositional change suggests the possibility that standard estimates suffer from aggregation bias arising from endogenous industry location patterns and the presence of zero observations in commodity-level trade. Adjusting for these effects reduces the estimate of the aggregate border effect from 20.9 to 5.7. JEL Classification: F14, F15