Estimating Distribution Costs with the Eaton–Kortum Model

• Author: Xuebing Yang
• Published date: 01 August 2015
• DOI: http://doi.org/10.1111/rode.12160
• Date: 01 August 2015

Estimating Distribution Costs with the

Eaton–Kortum Model

Xuebing Yang*

Abstract

Economists have mainly relied on input–output tables to calculate domestic trade costs for a relatively

small number of developed countries. In this work we use an augmented Eaton–Kortum model to estimate

the distribution costs of a group of consumption goods for 60 countries, which include both developing and

developed countries. Our results show that developing countries are subject to much higher distribution

costs, and that reductions in the distribution costs can result in large welfare gains.

1. Introduction

Economists have conducted extensive research on estimating the costs of shipping

goods between countries. Particularly, they have shown that developing countries face

higher international trade costs relative to developed countries. The asymmetry in the

international trade costs is also shown to be quantitatively important to understand-

ing the differences in standards of living across countries (Waugh, 2010).

In contrast, much less effort has been devoted to estimating the costs of shipping

goods within a country. Economists have so far relied mainly on input–output tables

to calculate domestic trade costs for a relatively small number of countries. Further-

more, the input–output tables are seldom available for developing countries, leaving

us almost completely agnostic about the domestic trade costs in poor countries rela-

tive to those in rich countries, let alone their effects on the living standards of these

developing countries.

In this paper, we try to fill this gap by suggesting a new approach that can estimate

domestic trade costs for a reasonable number of countries (60), which include both

developing and developed countries. Because of data availability, we focus on the dis-

tribution costs of food, beverages, tobacco, clothing and footwear that are consumed

by households, which we refer to as necessities for brevity. Our exercise gives us some

perspective about the relative restrictiveness to domestic trade in rich and poor coun-

tries for the first time. Our results show that distribution costs vary substantially

across countries, with developing countries having much higher distribution costs.

According to our benchmark results, distribution costs of the 10 countries with the

freest domestic markets have a simple average of 75.4% (ad valorem equivalent),

while those in the 10 countries with the most restrictive domestic markets have a

simple average of 438.8%.

We confront our results with the distribution costs derived directly from the input–

output tables for 16 high-income countries, and find that they accord well with each

* Yang: Pennsylvania State University at Altoona, 3000 Ivyside Dr, Altoona, PA 16601, USA. Tel: +1-814-

940-3317; Fax: +1-814-949-5456; E-mail: xyang@psu.edu. The author wishes to thank Jiandong Ju, Andres

Rodriguez-Clare, Henry Thompson and an anonymous referee for their helpful suggestions. All remaining

errors are those of the author.

Review of Development Economics, 19(3), 653–665, 2015

DOI:10.1111/rode.12160

© 2015 John Wiley & Sons Ltd