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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. Lawless, Martina, 2008. "Deconstructing Gravity: Trade Costs and Extensive and Intensive Margins," Research Technical Papers 5/RT/08, Central Bank of Ireland.
  2. Andrew Bernard & J. Bradford Jensen & Stephen Redding & Peter Schott, 2007. "Firms in International Trade," Working Papers 07-14, Center for Economic Studies, U.S. Census Bureau.
  3. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis.
  4. Santos Silva, J.M.C & Tenreyro, Silvana, 2005. "The Log of Gravity," CEPR Discussion Papers 5311, C.E.P.R. Discussion Papers.
  5. Keith Head & Thierry Mayer & John Ries, 2011. "The erosion of colonial trade linkages after independence," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  6. 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.
  7. Andrew K. Rose & Mark M. Spiegel, 2011. "The Olympic Effect," Economic Journal, Royal Economic Society, vol. 121(553), pages 652-677, 06.
  8. repec:esx:essedp:662 is not listed on IDEAS
  9. Anne-Célia Disdier & Keith Head, 2008. "The puzzling persistence of the distance effect on bilateral trade," Post-Print hal-01172854, HAL.
  10. Russell Hillberry & David Hummels, 2005. "Trade Responses to Geographic Frictions: A Decomposition Using Micro-Data," NBER Working Papers 11339, National Bureau of Economic Research, Inc.
  11. Rubinstein, Yona & Helpman, Elhanan & Melitz, Marc, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," Scholarly Articles 3228230, Harvard University Department of Economics.
  12. 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.
  13. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 441-487.
  14. Gianmarco Ottaviano & Thierry Mayer, . "The happy few: the internationalisation of European firms," Blueprints, Bruegel, number 12.
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