The magnitude of deviations from the Law of One Price (LOP) across cities depends on a number of characteristics, including language differences, distance, and other correlates of trade costs. We show that in the USA, political differences between cities are an equally important determinant of LOP deviations. LOP deviations are smaller if the cities are both strongly Democrat or both strongly Republican. These effects are of a similar order of magnitude to those of distance, and suggest that political differences represent a substantial barrier to competition.
|Number of pages||21|
|Journal||Oxford Economic Papers|
|Early online date||28 Feb 2021|
|Publication status||Published - 1 Jan 2022|
Research Beacons, Institutes and Platforms
- Global Development Institute