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Heterogeneous Firms, Globalization and the Distance Puzzle

  • Larch, Mario

    ()

    (University of Bayreuth)

  • Norbäck, Pehr-Johan

    ()

    (Research Institute of Industrial Economics (IFN))

  • Sirries, Steffen

    ()

    (University of Bayreuth)

  • Urban, Dieter

    (None)

Despite the strong pace of globalization, the distance effect on trade is persistent or even growing over time (Disdier and Head, 2008). To solve this distance puzzle, we use the recently developed gravity equation estimator from Helpman, Melitz and Rubinstein (2008), HMR henceforth. Using three different data sets, we find that the distance coefficient increases over time when OLS is used, while the non-linear estimation of HMR leads to a decline in the distance coefficient over time. The distance puzzle thus arises from a growing bias of OLS estimates. The latter is explained by globalization more significantly reducing the downward bias from omitting zero trade flows than it reduces the upward bias from omitting the number of heterogeneous exporting firms. Furthermore, we show that including zero-trade flows cannot solve the distance puzzle when using HMR. The HMR estimates are strongly correlated with the time pattern in freight costs reported by Hummels (2007).

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 957.

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Length: 43 pages
Date of creation: 05 Mar 2013
Date of revision:
Handle: RePEc:hhs:iuiwop:0957
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  1. Nicita, Alessandro & Olarreaga, Marcelo, 2001. "Trade and production, 1976-99," Policy Research Working Paper Series 2701, The World Bank.
  2. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2007. "Estimating Trade Flows: Trading Partners and Trading Volumes," NBER Working Papers 12927, National Bureau of Economic Research, Inc.
  3. Thierry Mayer & Keith Head & John Ries, 2008. "The Erosion of Colonial Trade Linkages after Independence," Working Papers 2008-27, CEPII research center.
  4. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  5. repec:esx:essedp:662 is not listed on IDEAS
  6. Baldwin, Richard & Harrigan, James, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," CEPR Discussion Papers 6368, C.E.P.R. Discussion Papers.
  7. Gilles Duranton & Michael Storper, 2005. "Rising trade costs?: agglomeration and trade with endogenous transaction costs," LSE Research Online Documents on Economics 19898, London School of Economics and Political Science, LSE Library.
  8. Yotov, Yoto V., 2012. "A simple solution to the distance puzzle in international trade," Economics Letters, Elsevier, vol. 117(3), pages 794-798.
  9. repec:lmu:muenar:20646 is not listed on IDEAS
  10. Krautheim, Sebastian, 2012. "Heterogeneous firms, exporter networks and the effect of distance on international trade," Journal of International Economics, Elsevier, vol. 87(1), pages 27-35.
  11. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  12. Edward Glaeser & Janet Kohlhase, 2003. "Cities, regions and the decline of transport costs," Papers in Regional Science, Springer;Regional Science Association International, vol. 83(1), pages 197-228, October.
  13. Jean-François Brun & Céline Carrère & Patrick Guillaumont & Jaime de Melo, 2005. "Has Distance Died? Evidence from a Panel Gravity Model," World Bank Economic Review, World Bank Group, vol. 19(1), pages 99-120.
  14. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  15. David Hummels & Peter J. Klenow, 2005. "The Variety and Quality of a Nation's Exports," American Economic Review, American Economic Association, vol. 95(3), pages 704-723, June.
  16. 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.
  17. Poschke, Markus, 2014. "The Firm Size Distribution across Countries and Skill-Biased Change in Entrepreneurial Technology," IZA Discussion Papers 7991, Institute for the Study of Labor (IZA).
  18. 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.
  19. Felbermayr, Gabriel & Kohler, Wilhelm K., 2006. "Exploring the intensive and extensive margins of world trade," Munich Reprints in Economics 20610, University of Munich, Department of Economics.
  20. David Hummels, 2007. "Transportation Costs and International Trade in the Second Era of Globalization," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 131-154, Summer.
  21. Blum, Bernardo S. & Goldfarb, Avi, 2006. "Does the internet defy the law of gravity?," Journal of International Economics, Elsevier, vol. 70(2), pages 384-405, December.
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