Buch(elektronisch)2014

Gravity model estimation: fixed effects vs. random intercept poisson pseudo maximum likelihood

In: Discussion paper 148

Prehn, Sören; Leibniz-Institut für Agrarentwicklung in Transformationsökonomien

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Abstract

Since the work of FEENSTRA (2002), the standard ANDERSON & VAN WINCOOP (2003) Gravity Model has been estimated using a fixed effects approach. However, a fixed effects approach has a major drawback: it does not allow for the estimation of exporter- and importer-invariant variables. Thus, economically relevant variables such as exporter and importer gross domestic product are disregarded. Here, we propose a random intercept model to address this gap. This approach not only provides identical estimates to a fixed effects approach, but also allows for the estimation of exporter- and importer-invariant variables.