Endogenous Transportation Costs

Abstract

Quantitative trade models used to evaluate the effects of policy changes have largely abstracted away from modeling the transportation industry. This paper extends a standard Armington trade model to incorporate an oligopolistically competitive transportation industry in which shippers endogenously choose a transportation technology. I collect detailed data on the containerized maritime transportation industry to calibrate the parameters of the model. I then conduct quantitative experiments in which there is a symmetric increase in tariffs. On average, changes in transportation costs account for almost half of the changes in welfare. These findings suggest that the endogeneity of transportation costs can substantially affect the estimated welfare effects of such a policy change.

Keywords: Trade Costs, Transportation Costs, Trade Liberalization

JEL Classification: F13, F15, D43