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Estimating the gravity equation with the actual number of exporting firms

  • Asier Minondo
  • Francisco Requena

    ()

To estimate correctly the effect of variable trade costs on firms’ exports, the gravity equation should control for the number of firms that participate in foreign markets. Due to the absence of these data, previous studies control for this omitted variable using econometric strategies that may also lead to inconsistent estimates. To overcome this problem the present paper estimates a gravity equation using a new database compiled by the OECD and Eurostat stat that reports the number of exporting firms by reporter and partner country. We show that not controlling for the extensive margin of trade introduces very serious biases in the estimated trade cost coefficients.

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File URL: http://www.estudiosdeeconomia.cl/publicacion/show/id/1376
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Article provided by University of Chile, Department of Economics in its journal Estudios de Economia.

Volume (Year): 40 (2013)
Issue (Month): 1 Year 2013 (June)
Pages: 5-19

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Handle: RePEc:udc:esteco:v:40:y:2013:i:1:p:5-19
Contact details of provider: Web page: http://www.econ.uchile.cl/

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  1. J.M.C. Santos Silva & Silvana Tenreyro, 2008. "Trading Partners and Trading Volumes:Implementing the Helpman-Melitz-Rubinstein Model Empirically," Economics Discussion Papers 662, University of Essex, Department of Economics.
  2. Andrew B. Bernard & J. Bradford Jensen & Stephen Redding & Peter K. Schott, 2007. "Firms in International Trade," CEP Discussion Papers dp0795, Centre for Economic Performance, LSE.
  3. Hillberry, Russell & Hummels, David, 2008. "Trade responses to geographic frictions: A decomposition using micro-data," European Economic Review, Elsevier, vol. 52(3), pages 527-550, April.
  4. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
  5. Matthieu Crozet & Pamina Koenig, 2007. "Structural gravity equations with intensive and extensive margins," EconomiX Working Papers 2007-36, University of Paris West - Nanterre la Défense, EconomiX.
  6. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting Trade: Firms, Industries, and Export Destinations," NBER Working Papers 10344, National Bureau of Economic Research, Inc.
  7. Rose, Andrew K & Spiegel, Mark, 2009. "The Olympic Effect," CEPR Discussion Papers 7248, C.E.P.R. Discussion Papers.
  8. Lawless, Martina, 2008. "Deconstructing Gravity: Trade Costs and Extensive and Intensive Margins," Research Technical Papers 5/RT/08, Central Bank of Ireland.
  9. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 441-487, 05.
  10. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
  11. Anne-Célia Disdier & Keith Head, 2008. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 37-48, February.
  12. Keith Head & Thierry Mayer & John Ries, 2008. "The erosion of colonial trade linkages after independence," Sciences Po publications 6951, Sciences Po.
  13. Gianmarco Ottaviano & Thierry Mayer, . "The happy few: the internationalisation of European firms," Blueprints, Bruegel, number 12, November.
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