A gravity model of virtual water trade

This work investigates the determinants of virtual water trade (VWT) flows by means of an estimated gravity model of trade applied to the virtual water embodied in the agricultural goods exchanged across countries. In line with the recent literature on the gravity model, the paper presents a battery of estimation methods: cross-section and panel, OLS and pseudo maximum likelihood, with and without two-way fixed effects. The analysis shows that bilateral VWT flows are affected by the classical determinants of trade, but also by national water endowments as well as by the level of pressure on water resources. These general findings are robust, even though some variation can be observed across the estimation methods and, in particular, when smaller sub-samples of countries (such as continents and regional groups) are considered. This contributes to account for the mixed evidence in the literature on the importance of water endowments for the VWT flows.