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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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File URL: ftp://147.156.210.157/RePEc/pdf/eec_1121.pdf
File Function: First version, 2011
Download Restriction: no

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. 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.
  2. Keith Head & Thierry Mayer & John Ries, 2008. "The erosion of colonial trade linkages after independence," Working Papers hal-01066116, HAL.
  3. Andrew K. Rose & Mark M. Spiegel, 2011. "The Olympic Effect," Economic Journal, Royal Economic Society, vol. 121(553), pages 652-677, 06.
  4. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 105-130, Summer.
  5. Matthieu Crozet & Pamina Koenig, 2010. "Structural gravity equation with intensive and extensive margins," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00610937, HAL.
  6. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
  7. 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.
  8. Lawless, Martina, 2008. "Deconstructing Gravity: Trade Costs and Extensive and Intensive Margins," MPRA Paper 10230, University Library of Munich, Germany.
  9. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting Trade: Firms, Industries, and Export Destinations," American Economic Review, American Economic Association, vol. 94(2), pages 150-154, May.
  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. Gianmarco Ottaviano & Thierry Mayer, . "The happy few: the internationalisation of European firms," Blueprints, Bruegel, number 12, APRIL.
  12. 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.
  13. repec:esx:essedp:662 is not listed on IDEAS
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