A test of the Alchian–Allen conjecture with transaction-level trade data

ABSTRACT

We use Kosovo’s transaction-level import value, tariff duties and transport cost data for very finely disaggregated products to test the Alchian–Allen conjecture. First, we show that the elasticity of freight costs to import prices is much lower than the unitary elasticity predicted by the iceberg transport cost hypothesis. Second, we find that import unit values rise with transport costs and decline with ad valorem tariffs. Our results confirm the Alchian–Allen conjecture that per-unit transport costs reduce the price of high-quality varieties relative to low-quality varieties, raising their relative demand in high freight cost destinations.

KEYWORDS:

• Alchian–Allen conjecture
• transaction-level data
• Kosovo
• iceberg transport costs

JEL CLASSIFICATION:

• F02
• F10

Acknowledgments

Findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, nor those of the Executive Directors of the World Bank or the governments they represent. We thank Kosovo’s Customs for providing us with the essential information to carry out the empirical analyses. Asier Minondo gratefully acknowledges financial support from the Spanish Ministry of Economy and Competitiveness (MINECO ECO2016-79650-P and ECO2015-68057-R, co-financed with FEDER) and the Basque Government Department of Education, Language Policy and Culture (IT885-16).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Other papers have tested the empirical validity of the Alchian–Allen conjecture in other markets, such as tickets for football games (Bertonazzi, Maloney, and Mccormick 1993), gasoline (Lawson and Raymer 2006) and marijuana (Lawson and Nesbit 2013). There is also a large body of literature that has addressed the theoretical validity of the Alchian–Allen conjecture (see Miljkovic (2018) for a recent summary).

² Our paper is closer to Wolanski (2017), who uses shipment-level import data to analyse the relationship between trade-related insurance costs and distance.

³ City d is one of the 16 of Kosovan customs offices where the transaction is cleared. We calculate origin-destination specific geodesic distances. Latitude and longitude data are obtained using the opencagegeo geocoding Stata module.

⁴ Note that some observations are dropped from the sample because there is no variation within some of the high-dimensional fixed effects.

⁵ Since the country of destination is always Kosovo, we only include an exporting country (j) subscript in the equation.

⁶ We calculate geodesic distances using the capital cities’ latitude and longitude from CEPII’s GeoDist database (Mayer and Zignano 2011).

⁷ We cannot compare our results with Hummels and Skiba (2004) because they report estimates based on the multi-country sample and a specification with instrumental variables (Table 2 in their paper).

Additional information

Funding

This work was supported by the Ministerio de Economía y Competitividad [ECO2015-68057-R,ECO2016-79650-P]; Basque Government Department of Education, Language Policy and Culture [IT885-16]; Spanish Ministry of Science, Innovation and Universities (RTI2018-100899-B-I00, co-financed with FEDER).