DP6909 Endogenous Borders? Exploring a Natural Experiment on Border Effects

Author(s): Hans Christian Heinemeyer , Max Stephan Schulze , Nikolaus Wolf

Publication Date: July 2008

Keyword(s): Border Effects , treatment effects , European history

JEL(s): F12 , F15 , N13 , N14

Programme Areas: International Trade and Regional Economics

Initiatives: Economic History

Link to this Page: www.cepr.org/pubs/dps/DP6909.asp.asp

A large literature documents the impact of borders on trade. However, in all these studies border effects are identified from cross-sectional variation alone. We do not know the "treatment effect" of borders nor can we rule out reverse causation. Here, we exploit the border changes imposed across Europe by the peace treaties in 1919-20 as a natural experiment. We estimate the effects of borders on trade with a difference in difference approach and find that the "treatment effects" of borders are significantly smaller than the pure cross-sectional effects. We show that this is related to ethno-linguistic networks. Borders shape trade, and trade shapes borders.