Estimating gravity equations with endogeneous trade costs

Stephan Rudolph

No 01/10, Dresden Discussion Paper Series in Economics from Technische Universität Dresden, Faculty of Business and Economics, Department of Economics

Abstract: A basic assumption of the gravity equation of international trade is that increasing trade costs lower exports. Butintuition and theory imply that a high export volume lowers bilateral trade costs as well, because a fixed cost intensivetrade sector probably bears lower average costs with more trade. In this case, standard gravity estimation might bebiased due to simultaneity. This paper finds an empirical interdependency between exports and trade costs. Using asimultaneous equation model to face this problem improves the estimates compared to the standard gravity specification.

Keywords: Gravity Equation; Trade Policy; Simultaneity Problem (search for similar items in EconPapers)
JEL-codes: C33 C5 F13 F17 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuddps:0110

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