Gravity with Gravitas: A Solution to the Border Puzzle

Institutions in International Relations: Understanding the Effects of the GATT and the WTO on World Trade

“…The primary advantage of FE estimates is robustness to certain forms of misspecification and endogeneity+ Their main disadvantage is inefficiency, since they do not exploit cross-sectional variation between dyads+ Given the large size of this data set, inefficiency is not too serious a problem+ Unless the proportion of variance between units is very large~which it is not!, there is sufficient withindyad variation to obtain good estimates using FE+ 29 In some cases, we wish to estimate time-varying effects for the GATT0WTO and other agreements by making the effect sizes a function of time+ One straightforward approach is to divide the sample into subperiods and to estimate either separate models or separate sets of coefficients for each subperiod+ The disadvantage of this approach is that the choice of subperiods is arbitrary and the estimated models imply implausible discontinuities in effect sizes at the period breaks+ A better approach, which allows for a smooth evolution of effect sizes over time, is the method of cubic splines+ The basic idea is to fit third degree polynomials in time that differ by subinterval but are joined at the period breakpoints, known as "knots+" We force the effects of the first and second derivatives of the spline function to agree at the knots+ Also, because splines behave poorly in the tails, we follow the suggestion of Stone to make the function linear in the first and last subintervals+ 30 29+ There are also theoretical reasons to prefer a fixed-effect model; see Feenstra 2004, 161-63+ Anderson andvan Wincoop 2003 derive a gravity-type specification from a model with each country producing a single differentiated good, CES utilities, and market clearing+ Their model implies the presence of a "multilateral resistance" term that can be approximated using country and time fixed effects+ Moreover, Baier and Bergstrand forthcoming conclude that, for research on trade agreements, the best approach to dealing with endogenous unit effects is either fixed effects or differencing+ 30+ Stone 1994+…”

Managing Fleet Capacity Effectively Under Second-Hand Market Redistribution

“…The use of the gravity model has been recently rehabilitated by the introduction of multilateral resistance terms solving the omitted bias problem (Anderson and van Wincoop 2003;Feenstra 2004;Anderson 2011). We use a demand-side structure gravity model as described in Anderson (2011) to analyze the number of second-hand vessels (X ij ) traded between districts of registration (i and j).…”

Exaggerated Death of Distance: Revisiting Distance Effects on Regional Price Dispersions

“…Helpman et al(2008) find that the distance elasticity of bilateral export volumes is approximately 80%, taking account of firms' selections into bilateral export markets with firm heterogeneity in productivity. 6 Importantly, their estimate suggests a 20% distance elasticity of transport costs under the same calibration of the elasticity of substitution as that used in Anderson and van Wincoop (2003). Why is our inference of the distance elasticity of transport costs widely diverse, at between approximately 3% and 20% when using data of equilibrium prices and quantities, respectively?…”