Does the Gravity Model Suffer from Selection Bias?
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.
References listed on IDEAS
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- Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.