Gravity and Heterogeneous Trade Cost Elasticities

Abstract How do trade costs affect international trade? This paper offers a new approach. We rely on flexible gravity equation that predicts variable cost elasticities, both across and within country pairs. apply this framework to popular variables such as currency unions, agreements World Trade Organization membership. While we estimate these are associated with increased bilateral average, find substantial heterogeneity. Consistent the predictions of our framework, effects strong for ‘thin’ relationships characterised by small import shares, weak or even zero ‘thick’ relationships.