Heterogeneous Firms, Globalisation and the Distance Puzzle

32 Pages Posted: 19 Sep 2016

See all articles by Mario Larch

Mario Larch

University of Bayreuth - Faculty of Law, Business and Economics; University of Bayreuth; CESifo; Ifo Institute for Economic Research; GEP at the University of Nottingham; Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Pehr‐Johan Norbäck

Research Institute of Industrial Economics (IFN)

Steffen Sirries

University of Bayreuth

Dieter M. Urban

Johannes Gutenberg University of Mainz - Institute for International Economic Theory; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2016

Abstract

Despite the strong pace of globalisation, the distance effect on trade is persistent or even growing over time (Disdier and Head, 2008). To solve this distance puzzle, we use the recently developed gravity equation estimator from Helpman et al. (2008) (HMR henceforth). Using three different data sets, we find that the distance coefficient increases over time when ordinary least squares (OLS) is used, while the non‐linear estimation of HMR leads to a decline in the distance coefficient over time. The distance puzzle, thus, arises from a growing bias of OLS estimates. The latter is explained by an increase in the importance of the bias from omitting the number of heterogeneous exporting firms relative to the bias from omitting zero trade flows. Furthermore, we show that including zero trade flows cannot solve the distance puzzle when using HMR. The HMR estimates are strongly correlated with the time pattern in freight costs reported by Hummels (2007).

Suggested Citation

Larch, Mario and Norbäck, Pehr‐Johan and Sirries, Steffen and Urban, Dieter M., Heterogeneous Firms, Globalisation and the Distance Puzzle (September 2016). The World Economy, Vol. 39, Issue 9, pp. 1307-1338, 2016. Available at SSRN: https://ssrn.com/abstract=2839993 or http://dx.doi.org/10.1111/twec.12303

Mario Larch (Contact Author)

University of Bayreuth - Faculty of Law, Business and Economics ( email )

Universitätsstraße 30
Bayreuth, 95447
Germany
0049 / (0) 921 - 55 6240 (Phone)

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Ifo Institute for Economic Research ( email )

Poschinger Str. 5
Munich, 01069
Germany

GEP at the University of Nottingham ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

Pehr‐Johan Norbäck

Research Institute of Industrial Economics (IFN)

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Steffen Sirries

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Dieter M. Urban

Johannes Gutenberg University of Mainz - Institute for International Economic Theory ( email )

D 55099 Mainz
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
106
PlumX Metrics