Gravity and Extended Gravity: Using Moment Inequalities to Estimate a Model of Export Entry

79 Pages Posted: 24 Feb 2014

See all articles by Eduardo Morales

Eduardo Morales

Princeton University - Department of Economics

Gloria Sheu

Board of Governors of the Federal Reserve System

Andrés Zahler

Universidad Diego Portales

Date Written: February 2014

Abstract

Exporting firms often enter foreign markets that are similar to previous export destinations. We develop a dynamic model in which a firm's exports in a market may depend on how similar the market is to the firm's home country (gravity) and to its previous export destinations (extended gravity). Given the large number of export paths from which forward-looking firms may choose, we use a moment inequality approach to structurally estimate our model. Using data from Chilean exporters, we estimate that having similarities with a prior export destination in geographic location, language, and income per capita jointly reduce the cost of foreign market entry by 69% to 90%. Reductions due to geographic location (25% to 38%) and language (29% to 36%) have the largest effect. Extended gravity thus has a large impact on export entry costs.

Suggested Citation

Morales, Eduardo and Sheu, Gloria and Zahler, Andres, Gravity and Extended Gravity: Using Moment Inequalities to Estimate a Model of Export Entry (February 2014). NBER Working Paper No. w19916. Available at SSRN: https://ssrn.com/abstract=2400262

Eduardo Morales (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Gloria Sheu

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andres Zahler

Universidad Diego Portales ( email )

Vergara 210
Santiago, Santiag
Chile

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