Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/142584 
Authors: 
Year of Publication: 
2010
Series/Report no.: 
EERI Research Paper Series No. 22/2010
Publisher: 
Economics and Econometrics Research Institute (EERI), Brussels
Abstract: 
Gravity type models are widely used in international economics. In these models the inclusion of time-fi0xed regressors like geographical or cultural distance, language and institutional (dummy) variables is often of vital importance e.g. to analyse the impact of trade costs on internationalization activity. This paper assesses the problem of parameter inconsistency due to a correlation of the time-fixed regressors with the combined error term in panel data settings. A common solution is to use Instrumental-Variable (IV) estimation in the spirit of Hausman-Taylor (1981) since a standard Fixed Effect Model (FEM) estimation is not applicable. However, some potential shortcomings of the latter approach recently gave rise to the use of non-IV two-step estimators. Given their growing number of empirical applications, we aim to compare the performance of IV and non-IV approaches in the presence of time-fixed variables and right hand side endogeneity using Monte Carlo simulations, where we explicitly control for the problem of IV selection in the Hausman-Taylor case. The simulation results show that the Hausman-Taylor model with perfect-knowledge about the underlying data structure (instrument orthogonality) has on average the smallest bias. However, compared to the empirically relevant specification with imperfect-knowledge and instruments chosen by statistical criteria, simple non-IV rival estimators performs equally well or even better. We illustrate these findings by estimating gravity type models for German regional export activity within the EU. The results show that the HT specification is likely to overestimate the role of trade costs proxied by geographical distance.
Subjects: 
Gravity model
Exports
Instrumental variables
two-step estimators
Monte Carlo
JEL: 
C15
C23
C52
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.