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The duration of trade revisited

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  • Wolfgang Hess

    ()

  • Maria Persson

    ()

Abstract

The recent literature on the duration of trade has predominantly analyzed the determinants of trade flow durations using Cox proportional hazards models. The purpose of this article is to show why it is inappropriate to analyze the duration of trade with continuous-time models such as the Cox model, and to propose alternative discrete-time models which are more suitable for estimation. In brief, the Cox model has three major drawbacks when applied to large trade data sets. First, it faces problems in the presence of many tied duration times, leading to biased coefficient estimates and standard errors. Second, it is difficult to properly control for unobserved heterogeneity, which can lead to parameter bias and bias in the estimated survivor function. Third, the Cox model imposes the restrictive and empirically questionable assumption of proportional hazards. In contrast, with discrete-time models there is no problem handling ties; unobserved heterogeneity can be controlled for without difficulty; and the restrictive proportional hazards assumption can easily be bypassed. By replicating an influential study by Besedeš and Prusa (J Int Econ 70:339–358, 2006b ), but employing discrete-time models as well as the original Cox model, we find empirical support for each of these arguments against the Cox model. Moreover, when comparing estimation results obtained from a Cox model and our preferred discrete-time specification, we find significant differences in both the predicted survivor functions and the estimated effects of explanatory variables on the hazard. In other words, the choice between models affects the economic conclusions that can be drawn. Copyright Springer-Verlag 2012

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 43 (2012)
Issue (Month): 3 (December)
Pages: 1083-1107

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Handle: RePEc:spr:empeco:v:43:y:2012:i:3:p:1083-1107

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Related research

Keywords: Duration of trade; Continuous-time versus discrete-time hazard models; Proportional hazards; Unobserved heterogeneity; C41; F10; F14;

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References

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Citations

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Cited by:
  1. MAYNERIS, Florian & PONCET, Sandra, 2011. "Entry on difficult export markets by Chinese domestic firms: the role of foreign export spillovers," CORE Discussion Papers 2011063, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Rudi, Jeta & Grant, Jason H. & Peterson, Everett B., 2012. "Survival of the Fittest: Explaining Export Duration and Export Failure in the U.S. Fresh Fruit and Vegetable Market," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124706, Agricultural and Applied Economics Association.
  3. Marco Fugazza & Alain McLaren, 2013. "Market Access, Export performance and Survival: Evidence from Peruvian Firms," Research Papers by the Department of Economics, University of Geneva 13021, Département des Sciences Économiques, Université de Genève.
  4. Nitsch, Volker & Besedes, Tibor, 2013. "Trade Integration and the Fragility of Trade Relationships: A Product Level Perspective," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79977, Verein für Socialpolitik / German Economic Association.
  5. Arjan Lejour, 2013. "The duration of Dutch export relations: decomposing firm, country and product characteristics," CPB Discussion Paper 258, CPB Netherlands Bureau for Economic Policy Analysis.
  6. Gullstrand, Joakim & Persson, Maria, 2012. "How to Combine High Sunk Costs of Exporting and Low Export Survival," Working Papers 2012:32, Lund University, Department of Economics.
  7. Tibor Besedeš, 2013. "The Role of NAFTA and Returns to Scale in Export Duration," CESifo Economic Studies, CESifo, vol. 59(2), pages 306-336, June.
  8. Fernandes, Ana M. & Paunov, Caroline, 2012. "The risks of innovation : are innovating firms less likely to die ?," Policy Research Working Paper Series 6103, The World Bank.
  9. Alem, Yonas & Hassen, Sied & Kohlin, Gunnar, 2013. "The Dynamics of Electric Cookstove Adoption: Panel Data Evidence from Ethiopia," Discussion Papers dp-13-03-efd, Resources For the Future.

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