Estimating Gravity Equations with Endogeneous Trade Costs

32 Pages Posted: 9 Feb 2010

See all articles by Stephan Rudolph

Stephan Rudolph

affiliation not provided to SSRN

Date Written: February 9, 2010

Abstract

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

Keywords: Gravity Equation, Trade Policy, Simultaneity Problem

JEL Classification: F13, F17, C33, C5

Suggested Citation

Rudolph, Stephan, Estimating Gravity Equations with Endogeneous Trade Costs (February 9, 2010). Available at SSRN: https://ssrn.com/abstract=1550065 or http://dx.doi.org/10.2139/ssrn.1550065

Stephan Rudolph (Contact Author)

affiliation not provided to SSRN ( email )

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