On the Specification of the Gravity Model of Trade: Zeros, Excess Zeros and Zero-Inflated Estimation

45 Pages Posted: 13 Apr 2009

See all articles by Martijn J. Burger

Martijn J. Burger

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Frank G. van Oort

University of Utrecht

Gert-Jan Linders

Ministry of Social Affairs and Employmen

Date Written: 30 2009 1,

Abstract

Conventional studies of bilateral trade patterns specify a log-normal gravity equation for empirical estimation. However, the log-normal gravity equation suffers from three problems: the bias created by the logarithmic transformation, the failure of the homoscedasticity assumption, and the way zero values are treated. These problems normally result in biased and inefficient estimates. Recently, the Poisson specification of the trade gravity model has received attention as an alternative to the log-normality assumption (Santos Silva and Tenreyro, 2006). However, the standard Poisson model is vulnerable for problems of overdispersion and excess zero flows. To overcome these problems, this paper considers modified Poisson fixed-effects estimations (negative binomial, zero-inflated). Extending the empirical model put forward by Santos Silva and Tenreyro (2006), we show how these techniques may provide viable alternatives to both the log-normal and standard Poisson specification of the gravity model of trade.

Keywords: international trade, gravity model, modified Poisson models, distance

JEL Classification: M13, O32, M, C82, F17

Suggested Citation

Burger, Martijn J. and van Oort, Frank and Linders, Gert-Jan, On the Specification of the Gravity Model of Trade: Zeros, Excess Zeros and Zero-Inflated Estimation (30 2009 1,). ERIM Report Series Reference No. ERS-2009-003-ORG. Available at SSRN: https://ssrn.com/abstract=1376148

Martijn J. Burger (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Burg. Oudlaan 50
Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Frank Van Oort

University of Utrecht ( email )

Vredenburg 138
NL-3508 TC Utrecht, 3511 BG
Netherlands

Gert-Jan Linders

Ministry of Social Affairs and Employmen ( email )

Den Haag
Netherlands

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