Comparative Advantage and Biased Gravity

47 Pages Posted: 9 Feb 2017

See all articles by Scott French

Scott French

UNSW Australia Business School, School of Economics

Date Written: January 31, 2017

Abstract

Gravity estimation based on sector-level trade data is generally misspecified because it ignores the role of product-level comparative advantage in shaping the effects of trade barriers on sector-level trade flows. Using a model that allows for arbitrary patterns of product-level comparative advantage, I show that sector-level trade flows follow a generalized gravity equation that contains an unobservable, bilateral component that is correlated with trade costs and omitted by standard sector-level gravity models. I propose and implement an estimator that uses product-level data to account for patterns of comparative advantage and find the bias in sector-level estimates to be significant. I also find that, when controlling for product-level comparative advantage, estimates are much more robust to distributional assumptions, suggesting that remaining biases due to heteroskedasticity and sample selection are less severe than previously thought.

Keywords: International Trade, Product-Level, Misspecification, Heteroskedasticity, Multi-Sector

JEL Classification: F10, F14, C13, C21, C50

Suggested Citation

French, Scott, Comparative Advantage and Biased Gravity (January 31, 2017). UNSW Business School Research Paper No. 2017-03, Available at SSRN: https://ssrn.com/abstract=2913921 or http://dx.doi.org/10.2139/ssrn.2913921

Scott French (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
148
Abstract Views
807
Rank
211,621
PlumX Metrics