Estimating Gravity Equation Models in the Presence of Sample Selection and Heteroskedasticity
AbstractGravity equation models are widely used in international trade to assess the impact of various policies on the patterns of trade. Although recent literature provides solid micro-foundations for the gravity equation model, there is no consensus on how to estimate a gravity equation model in the presence of the two stylized features of trade data: frequent zeros and heteroskedasticity. We propose a Two-Step Nonlinear Least Square estimator that satisfactorily deals with both problems. Monte-Carlo experiments show that the proposed estimator strictly outperforms the Poisson Pseudo Maximum Likelihood (PPML), the Heckman sample selection model, and the E.T.-Tobit estimators, and that it weakly dominates the Truncated PPML model in the estimation of the intensive margin of trade. An empirical study of world trade in 1986 suggests that currency union and regional trade agreements facilitate trade primarily through improving market access, as opposed to intensifying pre-existing trade.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 124530.
Date of creation: 2012
Date of revision:
Contact details of provider:
Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
gravity equation; heteroskedasticity; zeros; nonlinear least square; intensive margin; extensive margin; market access; Two-Step Nonlinear Least Square; International Relations/Trade; Research Methods/ Statistical Methods; F1; Q1; C5;
Find related papers by JEL classification:
- F1 - International Economics - - Trade
- Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
- NEP-ECM-2012-06-25 (Econometrics)
- NEP-INT-2012-06-25 (International Trade)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tibor Besedes & Thomas J. Prusa, 2007.
"The Role of Extensive and Intensive Margins and Export Growth,"
NBER Working Papers
13628, National Bureau of Economic Research, Inc.
- Besedes, Tibor & Prusa, Thomas J., 2011. "The role of extensive and intensive margins and export growth," Journal of Development Economics, Elsevier, vol. 96(2), pages 371-379, November.
- Ranjan, Priya & Tobias, Justin, 2007. "Bayesian Inference in the Gravity Model," Staff General Research Papers 12721, Iowa State University, Department of Economics.
- Novy, Dennis, 2012.
"International Trade without CES: Estimating Translog Gravity,"
CAGE Online Working Paper Series
100, Competitive Advantage in the Global Economy (CAGE).
- Novy, Dennis, 2013. "International trade without CES: Estimating translog gravity," Journal of International Economics, Elsevier, vol. 89(2), pages 271-282.
- Dennis Novy, 2010. "International Trade without CES: Estimating Translog Gravity," CESifo Working Paper Series 3008, CESifo Group Munich.
- Novy, Dennis, 2010. "International Trade without CES: Estimating Translog Gravity," CAGE Online Working Paper Series 32, Competitive Advantage in the Global Economy (CAGE).
- Novy, Dennis, 2012. "International Trade without CES: Estimating Translog Gravity," CEPR Discussion Papers 9125, C.E.P.R. Discussion Papers.
- Dennis Novy, 2010. "International Trade Without CES: Estimating Translog Gravity," CEP Discussion Papers dp1031, Centre for Economic Performance, LSE.
- Costas Arkolakis, 2008.
"Market Penetration Costs and the New Consumers Margin in International Trade,"
NBER Working Papers
14214, National Bureau of Economic Research, Inc.
- Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
- Russell Davidson & James G. MacKinnon, 1981.
"Tests for Model Specification in the Presence of Alternative Hypotheses: Some Further Results,"
430, Queen's University, Department of Economics.
- MacKinnon, James G. & White, Halbert & Davidson, Russell, 1983. "Tests for model specification in the presence of alternative hypotheses : Some further results," Journal of Econometrics, Elsevier, vol. 21(1), pages 53-70, January.
- Gabriel J. Felbermayr & Wilhelm Kohler, 2004.
"Exploring the Intensive and Extensive Margins of World Trade,"
CESifo Working Paper Series
1276, CESifo Group Munich.
- Gabriel J. Felbermayr & Wilhelm Kohler, 2006. "Exploring the Intensive and Extensive Margins of World Trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 142(4), pages 642-674, December.
- Shepherd, Ben, 2008.
"Geographical Diversification of Developing Country Exports,"
11267, University Library of Munich, Germany.
- shepherd, Ben, 2010. "Geographical Diversification of Developing Country Exports," World Development, Elsevier, vol. 38(9), pages 1217-1228, September.
- Lin Sun & Michael R. Reed, 2010. "Impacts of Free Trade Agreements on Agricultural Trade Creation and Trade Diversion," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(5), pages 1351-1363.
- Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, September.
- Maria Cipollina & Luca Salvatici & Luca De Benedictis & Claudio Vicarelli, 2013. "A note on dummies for policies in gravity models: a Montecarlo experiment," Departmental Working Papers of Economics - University 'Roma Tre' 0180, Department of Economics - University Roma Tre.
- Xiong, Bo & Beghin, John & Marette, Stéphan, 2013. "Gains to French champagne makers from tariff liberalization," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150003, Agricultural and Applied Economics Association.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).
If references are entirely missing, you can add them using this form.