Editor

Rómulo Chumacero

Executive Editor

Andrea Sandoval A.

Editorial Board

Abstracting & Indexing

Detalle / Detail

Estimating the gravity equation with the actual number of exporting firms

Authors: Minondo, Asier; Requena, Francisco

Vol. 40, Nº 1,
pp. 5 -
19 , 2013

Jel: F14, F15

To estimate correctly the effect of variable trade costs on firms’ exports, the

gravity equation should control for the number of firms that participate in foreign

markets. Due to the absence of these data, previous studies control for this

omitted variable using econometric strategies that may also lead to inconsistent

estimates. To overcome this problem the present paper estimates a gravity equation

using a new database compiled by the OECD and Eurostat stat that reports

the number of exporting firms by reporter and partner country. We show that

not controlling for the extensive margin of trade introduces very serious biases

in the estimated trade cost coefficients.

To estimate correctly the effect of variable trade costs on firms’ exports, the

gravity equation should control for the number of firms that participate in foreign

markets. Due to the absence of these data, previous studies control for this

omitted variable using econometric strategies that may also lead to inconsistent

estimates. To overcome this problem the present paper estimates a gravity equation

using a new database compiled by the OECD and Eurostat stat that reports

the number of exporting firms by reporter and partner country. We show that

not controlling for the extensive margin of trade introduces very serious biases

in the estimated trade cost coefficients.

**Key Words: ** Gravity equation, exporting firms, distance, trade costs, OECD.

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Fono: (+56 2) 2978 3455 · Fax: (+56 2) 2978 3421 · info@econ.uchile.cl