Understanding Interstate Trade Patterns
Abstract
This paper models interstate trade patterns of U.S. states using a partial equilibrium trade model. The theoretical model deviates from the existing gravity literature by incorporating a distribution margin at the final goods stages. The consequence of this feature is that the trade equation must be estimated in ratio form, with the ratio of imports from different sources, rather than the level of bilateral trade between two locations. This ratio transformation effectively eliminates the distribution margin from the theoretical trade equation. Using this specification, together with considering the production side through technology levels, the elasticity of substitution across goods, the elasticity of substitution across varieties of each good, and the good specific elasticity of distance measures are all identified in the empirical analysis, which is also not the case in most gravity type studies. Compared to empirical international trade literature, the elasticity of substitution is estimated to be lower, while the elasticity of distance is estimated to be higher intranationally.