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Does the Gravity Model Suffer from Selection Bias?

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Author Info

  • Haq, Zahoor Ul
  • Meilke, Karl D.
  • Cranfield, John A.L.

Abstract

When analyzing bilateral trade flow data, zero trade flows are quite common and problematic when a gravity equation is estimated with a log-linear functional form. This has caused many researchers to either ignore the zero trade flows or to replace zero with a small positive number. Both of these actions bias the resulting parameter estimates of the gravity equation. In this study we correct for this misspecification by using the Heckman selection model to estimate the bilateral trade flows for 46 agrifood products, for the period 1990 to 2000, for 52 countries. In our sample, selection bias rarely affects the signs of variables but often has a substantial effect on the magnitude, statistical significance and economic interpretation of the marginal effects. Hence, treating zero trade flows properly is important from both a statistical and an economics perspective.

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File URL: http://purl.umn.edu/90884
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Bibliographic Info

Paper provided by Canadian Agricultural Trade Policy Research Network in its series Working Papers with number 90884.

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Date of creation: Jan 2010
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Handle: RePEc:ags:catpwp:90884

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Related research

Keywords: Gravity model; selection bias; Agrifood Trade; Heckman Selection Model; marginal effects; Agricultural and Food Policy; Demand and Price Analysis; International Relations/Trade;

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References

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  1. Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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Cited by:
  1. Cairns, Alexander P. & Meilke, Karl D., 2012. "Canadian Agrifood Export Performance and the Growth Potential of the BRICs and Next-11," Trade Policy Briefs 145973, Canadian Agricultural Trade Policy Research Network.
  2. Haq, Zahoor Ul & Meilke, Karl D. & Cranfield, John A.L., 2011. "The Gravity Model and the Problem of Zero`s in Agrifood Trade," Working Papers 116851, Canadian Agricultural Trade Policy Research Network.

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