Hillberry & Hummels “Trade responses to geographic frictions: A decomposition using micro-data” (European Economic Review, 2008):
The highly non-linear effect of distance on trade may help explain some results in the ‘‘home bias’’ literature. While our estimates on 3-digit zip code data reveal that intra-state shipments are significantly higher than cross-state shipments, this effect disappears entirely when shipment distances are measured more accurately using 5-digit zip codes. We instead find that the ‘‘borders’’ between 5-digit zip codes represent a sizeable barrier to trade. We consider these zip-code effects the reductio ad absurdum of the home bias literature. While one can imagine many barriers to trade that operate at national borders, it is harder to conceive of what barriers plausibly operate at state borders, and harder still to imagine those associated with 5-digit zip codes. Our results suggest that ‘‘home bias,’’ at least in state borders, is an artifact of geographic aggregation. Since shipments drop off extraordinarily rapidly over very short distances, attempts to measure border effects on larger geographical groupings are nearly certain to ascribe the non-linear effects of distance to ‘‘home bias’’ dummy variables.