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Title:Estimating gravity equations with endogeneous trade costs PDF Logo
Authors:Rudolph, Stephan
Issue Date:2010
Series/Report no.:Dresden discussion paper series in economics 01/10
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.
Subjects:Gravity Equation
Trade Policy
Simultaneity Problem
JEL:F13
F17
C33
C5
Document Type:Working Paper
Appears in Collections:Dresden Discussion Paper Series in Economics, Faculty of Business and Economics, TU Dresden

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