Estimating Gravity Equation Models in the Presence of Sample Selection and Heteroskedasticity
نویسندگان
چکیده
Gravity models are widely used to explain patterns of trade. However, two stylized features of trade data, sample selection and heteroskedasticity, 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 heteroskedasticity. 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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