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Estimating the gravity equation with the actual number of exporting firms

  • Asier Minondo

    (Deusto Business School)

  • Francisco Requena-Silvente

    (Universidad de Valencia)

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 estimations. To overcome this problem the present paper estimates a gravity equation using a new database compiled by the OECD and Eurostat that reports the number of exporting firms by reporter and partner country. We show that no controlling for the extensive margin of trade introduces very serious biases in the estimated trade cost coefficients. Moreover, these biases are much larger than predicted by previous studies.

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Paper provided by Department of Applied Economics II, Universidad de Valencia in its series Working Papers with number 1121.

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Length: 23 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:eec:wpaper:1121
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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. Lawless, Martina, 2008. "Deconstructing Gravity: Trade Costs and Extensive and Intensive Margins," MPRA Paper 10230, University Library of Munich, Germany.
  3. Bernard, Andrew B. & Jensen, J Bradford & Redding, Stephen J. & Schott, Peter K., 2007. "Firms in International Trade," CEPR Discussion Papers 6277, C.E.P.R. Discussion Papers.
  4. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis.
  5. Rubinstein, Yona & Helpman, Elhanan & Melitz, Marc, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," Scholarly Articles 3228230, Harvard University Department of Economics.
  6. Keith Head & Thierry Mayer & John Ries, 2011. "The erosion of colonial trade linkages after independence," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  7. Matthieu Crozet & Pamina Koenig, 2008. "Structural Gravity Equations with Intensive and Extensive Margins," Working Papers 2008-30, CEPII research center.
  8. Santos Silva, J.M.C & Tenreyro, Silvana, 2005. "The Log of Gravity," CEPR Discussion Papers 5311, C.E.P.R. Discussion Papers.
  9. Andrew K. Rose & Mark M. Spiegel, 2009. "The Olympic Effect," NBER Working Papers 14854, National Bureau of Economic Research, Inc.
  10. 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.
  11. 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.
  12. 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.
  13. Gianmarco Ottaviano & Thierry Mayer, . "The happy few: the internationalisation of European firms," Blueprints, Bruegel, number 12, June.
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