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Integrating gravity: the role of scale invariance in gravity models of spatial interactions and trade

  • Arvis, Jean-François
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    This paper revisits the ubiquitous bi-proportional gravity model and investigates the reasons why different theoretical frameworks may lead to the same empirical formula. The generic gravity equation possesses scale invariance symmetries that constrain possible theoretical explanations based on optimal allocation principles, such as neoclassical or probabilistic frameworks. These constraints imply that a representative consumer's utilities must be separable, and that an entropy model is the only consistent maximum likelihood allocation of a matrix of flows between origin and destination. The paper explores the feasibility of wider classes of non-scale invariant gravity equations, where gravity is no longer bi-proportional by including nonlinear interactions between trade costs and fundamental country factors such as economic size. It shows that such extensions are feasible but that they do not result in a significant improvement in the explanatory power of the empirical analysis.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6347.

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    Date of creation: 01 Jan 2013
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    Handle: RePEc:wbk:wbrwps:6347
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    1. Dennis Novy, 2012. "Gravity Redux: Measuring International Trade Costs with Panel Data," CEP Discussion Papers dp1114, Centre for Economic Performance, LSE.
    2. Novy, Dennis, 2012. "International Trade without CES: Estimating Translog Gravity," CEPR Discussion Papers 9125, C.E.P.R. Discussion Papers.
    3. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    4. James E. Anderson, 2010. "The Gravity Model," NBER Working Papers 16576, National Bureau of Economic Research, Inc.
    5. Santos Silva, J.M.C & Tenreyro, Silvana, 2005. "The Log of Gravity," CEPR Discussion Papers 5311, C.E.P.R. Discussion Papers.
    6. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
    7. John Roy & Jean-Claude Thill, 2003. "Spatial interaction modelling," Economics of Governance, Springer, vol. 83(1), pages 339-361, October.
    8. John Roy & Jean-Claude Thill, 2003. "Spatial interaction modelling," Papers in Regional Science, Springer, vol. 83(1), pages 339-361, October.
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