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Does the Gravity Model Suffer from Selection Bias?

Author

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  • Haq, Zahoor Ul
  • Meilke, Karl D.
  • Cranfield, John A.L.

Abstract

When analyzing bilateral trade flow data, zero trade flows are quite common and problematic when a gravity equation is estimated with a log-linear functional form. This has caused many researchers to either ignore the zero trade flows or to replace zero with a small positive number. Both of these actions bias the resulting parameter estimates of the gravity equation. In this study we correct for this misspecification by using the Heckman selection model to estimate the bilateral trade flows for 46 agrifood products, for the period 1990 to 2000, for 52 countries. In our sample, selection bias rarely affects the signs of variables but often has a substantial effect on the magnitude, statistical significance and economic interpretation of the marginal effects. Hence, treating zero trade flows properly is important from both a statistical and an economics perspective.

Suggested Citation

  • Haq, Zahoor Ul & Meilke, Karl D. & Cranfield, John A.L., 2010. "Does the Gravity Model Suffer from Selection Bias?," Working Papers 90884, Canadian Agricultural Trade Policy Research Network.
  • Handle: RePEc:ags:catpwp:90884
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    File URL: http://purl.umn.edu/90884
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    References listed on IDEAS

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    1. Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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    Cited by:

    1. Haq, Zahoor Ul & Meilke, Karl D. & Cranfield, John A.L., 2011. "The Gravity Model and the Problem of Zero`s in Agrifood Trade," Working Papers 116851, Canadian Agricultural Trade Policy Research Network.
    2. Cairns, Alexander P. & Meilke, Karl D., 2012. "Canadian Agrifood Export Performance and the Growth Potential of the BRICs and Next-11," Working Papers 142372, Canadian Agricultural Trade Policy Research Network.

    More about this item

    Keywords

    Gravity model; selection bias; Agrifood Trade; Heckman Selection Model; marginal effects; Agricultural and Food Policy; Demand and Price Analysis; International Relations/Trade;

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