Instrumental-Variable Estimation Of Exponential Regression Models With Two-Way Fixed Effects With An Application To Gravity Equations

Koen Jochmans and Vincenzo Verardi

No 21-1271, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This paper introduces instrumental-variable estimators for exponential-regression models that feature two-way fixed effects. These techniques allow us to develop a theory-consistent approach to the estimation of cross-sectional gravity equations that can accommodate the endogeneity of policy variables. We apply this approach to a data set in which the policy decision of interest is the engagement in a free trade agreement. We explore ways to exploit the transitivity observed in the formation of trade agreements to construct instrumental variables with considerable predictive ability. Within a bilateral model, the use of these instruments has strong theoretical foundations. We obtain point estimates of the partial effect of a preferential-trade agreement on trade volume that range between 20% and 30% and find no statistical evidence of endogeneity.

Keywords: Bias correction; count data; differencing estimator; endogeneity; fixed effects; gravity equation; instrumental variable; transitivity (search for similar items in EconPapers)
JEL-codes: C23 C26 F14 (search for similar items in EconPapers)
Date: 2021-11-30
New Economics Papers: this item is included in nep-ecm, nep-int and nep-ore
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Related works:
Journal Article: Instrumental‐variable estimation of exponential‐regression models with two‐way fixed effects with an application to gravity equations (2022)
Working Paper: Instrumental-Variable Estimation Of Exponential Regression Models With Two-Way Fixed Effects With An Application To Gravity Equations (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:126195

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