Estimating gravity equation models in the presence of sample selection and heteroscedasticity |
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Authors: | Bo Xiong Sixia Chen |
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Institution: | 1. Agricultural Issues Center, University of California, Davis 95616, USAboxiong@ucdavis.edu;3. Westat Corporation, Rockville, USA |
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Abstract: | Gravity models are widely used to explain patterns of trade. However, two stylized features of trade data, sample selection and heteroscedasticity challenge the estimation of gravity models. We propose a two-step method of moments (TS-MM) estimator that deals with both issues. The Monte-Carlo experiments show that the TS-MM estimates are resistant to various combinations of sample selection and heteroscedasticity. Moreover, the TS-MM estimator performs reasonably well even when the data generating process deviates from the TS-MM assumptions. We revisit the world trade in 1990 to illustrate the usefulness of the proposed model, with emphasis on the identification of the extensive margin of trade. |
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Keywords: | gravity equation heteroscedasticity zeros sample selection two-step method of moments extensive margin market access |
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