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The Duration of Trade Revisited. Continuous-Time vs. Discrete-Time Hazards

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  • Hess, Wolfgang

    ()
    (Department of Economics, Lund University)

  • Persson, Maria

    ()
    (Department of Economics, Lund University)

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 paper 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. Briefly, 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 result in spurious duration dependence and parameter bias. Third, the Cox model imposes the restrictive and empirically questionable assumption of proportional hazards. By 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 from 2006, 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 hazard rates and the estimated effects of explanatory variables on the hazard. In other words, the choice between models affects the conclusions that can be drawn.

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Bibliographic Info

Paper provided by Lund University, Department of Economics in its series Working Papers with number 2010:1.

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Length: 27 pages
Date of creation: 19 Feb 2010
Date of revision:
Publication status: Forthcoming as Hess, Wolfgang and Maria Persson, 'The Duration of Trade Revisited. Continuous-Time vs. Discrete-Time Hazards' in Empirical Economics.
Handle: RePEc:hhs:lunewp:2010_001

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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en
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Keywords: Duration of Trade; Continuous-Time versus Discrete-Time Hazard Models; Proportional Hazards; Unobserved Heterogeneity;

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References

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  1. Besedes, Tibor & Prusa, Thomas J., 2006. "Product differentiation and duration of US import trade," Journal of International Economics, Elsevier, vol. 70(2), pages 339-358, December.
  2. Stephen W. Salant, 1974. "Search theory and duration data: a theory of sorts," Special Studies Papers 42, Board of Governors of the Federal Reserve System (U.S.).
  3. Volker Nitsch, 2007. "Die Another Day: Duration in German Import Trade," CESifo Working Paper Series 2085, CESifo Group Munich.
  4. Heckman, James J. & Singer, Burton, 1984. "Econometric duration analysis," Journal of Econometrics, Elsevier, vol. 24(1-2), pages 63-132.
  5. Michael Baker & Angelo Melino, 1999. "Duration Dependence and Nonparametric Heterogeneity: A Monte Carlo Study," Working Papers melino-99-01, University of Toronto, Department of Economics.
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  7. Paul Brenton & Christian Saborowski & Erik von Uexkull, 2010. "What Explains the Low Survival Rate of Developing Country Export Flows?," World Bank Economic Review, World Bank Group, vol. 24(3), pages 474-499, December.
  8. McCall, Brian P, 1994. "Testing the Proportional Hazards Assumption in the Presence of Unmeasured Heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(3), pages 321-34, July-Sept.
  9. Tibor Besedes & Thomas Prusa, 2006. "Ins, outs, and the duration of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 266-295, February.
  10. Nicoletti, Cheti & Rondinelli, Concetta, 2010. "The (mis)specification of discrete duration models with unobserved heterogeneity: A Monte Carlo study," Journal of Econometrics, Elsevier, vol. 159(1), pages 1-13, November.
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  16. 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.
  17. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
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  20. Tibor Besedeš, 2008. "A Search Cost Perspective on Formation and Duration of Trade," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 835-849, November.
  21. Sueyoshi, Glenn T, 1995. "A Class of Binary Response Models for Grouped Duration Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(4), pages 411-31, Oct.-Dec..
  22. Thomas A. Mroz & Yaraslau V. Zayats, 2008. "Arbitrarily Normalized Coefficients, Information Sets, and False Reports of "Biases" in Binary Outcome Models," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 406-413, August.
  23. Hess, Wolfgang, 2009. "A Flexible Hazard Rate Model for Grouped Duration Data," Working Papers 2009:18, Lund University, Department of Economics.
  24. Lancaster, Tony, 1979. "Econometric Methods for the Duration of Unemployment," Econometrica, Econometric Society, vol. 47(4), pages 939-56, July.
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Citations

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Cited by:
  1. Besedes, Tibor, 2010. "Export Differentiation in Transition Economies," MPRA Paper 26362, University Library of Munich, Germany.
  2. Besedes, Tibor, 2011. "The role of NAFTA and returns to scale in export duration," MPRA Paper 31217, University Library of Munich, Germany.
  3. Cadot, Olivier & Iacovone, Leonardo & Pierola, Martha Denisse & Rauch, Ferdinand, 2013. "Success and failure of African exporters," Journal of Development Economics, Elsevier, vol. 101(C), pages 284-296.
  4. Florian MAYNERIS & Sandra PONCET, 2011. "Entry on difficult export markets by Chinese domestic firms: the role of foreign export spillovers," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2011041, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  5. Peter Nunnenkamp & Hannes Öhler & Tillmann Schwörer, 2011. "US based NGOs in International Development Cooperation: Survival of the Fittest?," DEGIT Conference Papers c016_046, DEGIT, Dynamics, Economic Growth, and International Trade.
  6. Hess , Wolfgang & Persson, Maria, 2011. "Exploring the Long-Term Evolution of Trade Survival," Working Paper Series 880, Research Institute of Industrial Economics.
  7. Hess, Wolfgang & Persson, Maria, 2010. "Exploring the Duration of EU Imports," Working Paper Series 849, Research Institute of Industrial Economics.
  8. Mayneris, Florian & Poncet, Sandra, 2013. "Chinese firms'entry to export markets : the role of foreign export spillovers," Policy Research Working Paper Series 6398, The World Bank.
  9. Stirbat, Liviu & Record, Richard & Nghardsaysone, Konesawang, 2013. "Determinants of export survival in the Lao PDR," Policy Research Working Paper Series 6301, The World Bank.

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