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Gravity and Extended Gravity: Using Moment Inequalities to Estimate a Model of Export Entry

Listed author(s):
  • Eduardo Morales
  • Gloria Sheu
  • Andrés Zahler

Exporting firms continuously change export destinations. We present reduced-form evidence indicating firms are more likely to export to countries that are geographically close to their previous destinations. This evidence for path dependence in exports is robust to controlling for firm-country specific unobservable determinants of export choices that might be correlated over time and space. Accordingly, we develop a model of export dynamics in which firms' exports in each market may depend on: (a) how similar this market is to the firm's home country (gravity), and (b) how similar it is to other countries to which the firm has previously exported (extended gravity). Given the large number of possible export paths from which forward-looking firms may choose, estimation approaches based on discrete choice models are computationally infeasible. Instead, we use a moment inequality approach. We conclude that extended gravity effects may reduce the cost of entering an export market by up to 40%.

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File URL: http://www.nber.org/papers/w19916.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19916.

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Date of creation: Feb 2014
Handle: RePEc:nbr:nberwo:19916
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