Centrality Bias in Inter-city Trade

Abstract

Large cities with central location excessively export to smaller cities in close proximity. Using Japanese inter-city trade data, we identify a substantial centrality bias: Exports from central places to their hinterland are 40%-100% larger than predicted by gravity forces. This upward bias stems from aggregating industries, which are hierarchically distributed across large and small cities. Decomposing the centrality bias along the margins of our data, we identify the extensive industry margin as the main driver behind this aggregation bias. Relying on a theory-consistent decomposition of the aggregate gravity equation, we also sort out the underlying theoretical channels that are responsible for the manifestation of the centrality bias.