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On the Problem of Endogenous Unobserved Effects in the Estimation of Gravity Models


  • Egger, Peter

    () (University of Innsbruck)


We propose to estimate gravity models by a Hausman and Taylor (1981) 2SLS error components approach. First, this allows to account for the possible correlation of some of the regressors with the unobserved effects, which has been ignored in previous research. Second and in contrast to the Within estimator, one obtains estimates for the time-invariant variables also in a framework with bilateral effects. We show that distance and country size are important sources of correlation. The properly estimated parameter of distance is about twice as high as its biased GLS counterpart and markedly higher than found by others.

Suggested Citation

  • Egger, Peter, 2004. "On the Problem of Endogenous Unobserved Effects in the Estimation of Gravity Models," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 19, pages 182-191.
  • Handle: RePEc:ris:integr:0271

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    References listed on IDEAS

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    1. Nicolas Péridy, 2006. "La nouvelle politique de voisinage de l'Union européenne. Une estimation des potentiels de commerce," Revue économique, Presses de Sciences-Po, vol. 57(4), pages 727-746.
    2. Péridy Nicolas, 2005. "Trade Prospects of the New EU Neighborhood Policy: Evidence from Hausman and Taylor's Models," Global Economy Journal, De Gruyter, vol. 5(1), pages 1-27, March.
    3. A. Cheptea & A. Gohin & Marilyne Huchet-Bourdon, 2008. "Applying the gravity approach to sector trade: who bears the trade costs?," Post-Print hal-00742046, HAL.
    4. Peridy Nicolas J & Abedini Javad, 2008. "The Growing Influence of Emerging Countries in the World Car Industry: An Estimation of Export Potentials in a World Trade Model," Global Economy Journal, De Gruyter, vol. 8(3), pages 1-28, September.
    5. Nuria Gallego & Carlos Llano, 2014. "The Border Effect and the Nonlinear Relationship between Trade and Distance," Review of International Economics, Wiley Blackwell, vol. 22(5), pages 1016-1048, November.
    6. repec:ebl:ecbull:v:6:y:2006:i:2:p:1-11 is not listed on IDEAS
    7. Chevassus-Lozza, Emmanuelle & Majkovic, Darja & Persillet, Vanessa & Unguru, Manuela, 2005. "Technical Barriers to Trade in the European Union : Importance for the New EU Members. An Assessment for Agricultural and Food Products," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24621, European Association of Agricultural Economists.
    8. Abu Hatab, Assem, 2015. "The Impact of Regional Integration on Intra-Arab Trade in Agrifood Commodities: A Panel Data Approach," MPRA Paper 67991, University Library of Munich, Germany, revised 07 Jun 2015.
    9. Tom Broekel & Pierre-Alexandre Balland & Martijn Burger & Frank van Oort, 2013. "Modeling Knowledge Networks in Economic Geography: A Discussion of Four Empirical Strategies," Papers in Evolutionary Economic Geography (PEEG) 1325, Utrecht University, Department of Human Geography and Spatial Planning, Group Economic Geography, revised Dec 2013.
    10. Yongcheol Shin & Laura Serlenga, 2007. "Gravity models of intra-EU trade: application of the CCEP-HT estimation in heterogeneous panels with unobserved common time-specific factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 361-381.
    11. repec:bla:reviec:v:25:y:2017:i:4:p:760-773 is not listed on IDEAS
    12. P. Montalbano & S. Nenci, 2014. "Assessing the trade impact of the European Neighbourhood Policy on the EU-MED Free Trade Area," Applied Economics, Taylor & Francis Journals, vol. 46(7), pages 730-740, March.
    13. Markus Leibrecht & Johann Scharler, 2009. "How important is employment protection legislation for Foreign Direct Investment flows in Central and Eastern European countries?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 17(2), pages 275-295, April.
    14. Jouini, Nizar & Oulmane, Nassim & Peridy, Nicolas, 2014. "North African countries (NACs) production and export structure: Towards diversification and export sophistication strategy," MPRA Paper 62476, University Library of Munich, Germany.
    15. Nicolas Péridy, 2006. "The European Union and its new neighbors: an estimation of migration potentials," Economics Bulletin, AccessEcon, vol. 6(2), pages 1-11.
    16. Yongcheol Shin & Laura Serlenga, 2004. "Gravity Models of the Intra-EU Trade: Application of the Hausman-Taylor Estimation in Heterogeneous Panels with Common Time-specific Factors," Econometric Society 2004 Far Eastern Meetings 671, Econometric Society.
    17. Claudia M. Buch & Farid Toubal, 2003. "Economic Integration and FDI in Transition Economies: What Can We Learn from German Data?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 72(4), pages 594-610.
    18. Stella Capuano & Silvia Migali, 2017. "The migration of professionals within the EU: Any barriers left?," Review of International Economics, Wiley Blackwell, vol. 25(4), pages 760-773, September.
    19. Toubal, Farid & Kleinert, Jörn & Buch, Claudia M., 2003. "Determinants of German FDI: New Evidence from Micro-Data," Discussion Paper Series 1: Economic Studies 2003,09, Deutsche Bundesbank.
    20. Peridy, Nicolas, 2005. "The trade effects of the Euro-Mediterranean partnership: what are the lessons for ASEAN countries?," Journal of Asian Economics, Elsevier, vol. 16(1), pages 125-139, February.
    21. Mitze, Timo & Alecke, Björn & Untiedt, Gerhard, 2008. "Trade, FDI and Cross-Variable Linkages: A German (Macro-)Regional Perspective," MPRA Paper 12245, University Library of Munich, Germany.
    22. Tom Broekel & Pierre-Alexandre Balland & Martijn Burger & Frank Oort, 2014. "Modeling knowledge networks in economic geography: a discussion of four methods," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 53(2), pages 423-452, September.
    23. Gert-Jan M. Linders & Henri L.F. de Groot & Raymond J.G.M. Florax & Peter Nijkamp, 2011. "Persistent Distance Decay Effects in International Trade," Chapters,in: International Handbook on the Economics of Integration, Volume II, chapter 14 Edward Elgar Publishing.

    More about this item


    Gravity equation; Panel econometrics;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade


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