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How serious is the omission of bilateral tariff rates in gravity?

  • Hayakawa, Kazunobu

This paper presents a constructed dataset of worldwide bilateral tariff rates to explore the seriousness of omitting bilateral tariff rates from gravity equations. Results indicate, first, that omitting bilateral tariff rates presents no serious issue related to the omitted variable bias because coefficients for the usual gravity variables remain unchanged before and after their inclusion. Second, the widely used dummy variable for regional trade agreements is not a statistical substitute for tariff rates because the coefficient for bilateral tariff rates remains significant even if it is included. Similarly, time-invariant pair fixed effects alongside time-variant importer and exporter fixed effects do not substitute statistically for omitted tariff rates.

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File URL: http://www.sciencedirect.com/science/article/pii/S0889158313000038
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Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 27 (2013)
Issue (Month): C ()
Pages: 81-94

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Handle: RePEc:eee:jjieco:v:27:y:2013:i:c:p:81-94
DOI: 10.1016/j.jjie.2013.01.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622903

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