Assessing Transit Rents

Abstract

Trading frictions due to inevitable transportation costs are fundamentally different from those due to rent extraction by transit countries. We propose a theoretical and empirical methodology to disentangle these two types of costs and assess the presence and global magnitude of a hold-up problem. We construct a new measure of distance based on a global network of the most likely trade routes. While transportation costs make all countries worse off, rent extraction benefits transit countries. Further, we show that in general equilibrium, countries that are neither landlocked nor transit countries bear a large share of the cost of distortions due to rent extraction. While free trade agreements with transit countries do not appear to mitigate the problem, customs unions do.

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