Abstract
This paper analyzes the role of institutions in price dispersion among cities in the European region in the 1996-2009 period. An overview of the literature on the border effect reveals that the role of institutions is completely neglected.
Using the Worldwide Governance Indicators as explanatory variables I find that the better the institutions, the lower the predicted dispersion. The result is robust to different specifications of the regression model and it is consistent with a hypothesis that arbitrage, as an entrepreneurial activity and the main power behind the law of one price, is influenced by institutional quality.