Gert-Jan M. Linders

On the Specification of the Gravity Model of Trade: Zeros, Excess Zeros and Zero-Inflated Estimation

Conventional studies of bilateral trade patterns specify a log-normal gravity equation for empirical estimation. However, the log-normal gravity equation suffers from three problems: the bias created by the logarithmic transformation, the failure of the homoscedasticity assumption, and the way zero values are treated. These problems normally result in biased and inefficient estimates. Recently, the Poisson specification of the trade gravity model has received attention as an alternative to the log-normality assumption (Santos Silva and Tenreyro, 2006). However, the standard Poisson model is vulnerable for problems of overdispersion and excess zero flows. To overcome these problems, this paper considers modified Poisson fixed-effects estimations (negative binomial, zero-inflated). Extending the empirical model put forward by Santos Silva and Tenreyro (2006), we show how these techniques may provide viable alternatives to both the log-normal and standard Poisson specification of the gravity model of trade.

Estimation of the Gravity Equation in the Presence of Zero Flows

The gravity model is the workhorse model to describe and explain variation in bilateral trade patterns. Consistent with both Heckscher-Ohlin models and models of imperfect competition and trade, this versatile model has proven to be very successful, explaining a large part of the variance in trade flows. However, the log-linear model cannot straightforwardly account for the occurrence of zero-valued trade flows between pairs of countries. This paper investigates the various approaches suggested to deal with zero flows. Apart from the option to omit the zero flows from the sample, various extensions of Tobit estimation, truncated regression, probit regression and substitutions for zero flows have been suggested. We argue that the choice of method should be based on both economic and econometric considerations. The sample selection model appears to fit both considerations best. Moreover, we show that the choice of method may matter greatly for the results. In the end, the results surprisingly suggest that the simplest solution, to omit zero flows from the sample, often leads to acceptable results, although the sample selection model is preferred theoretically and econometrically.

The Institutional Determinants of Bilateral Trade Patterns

The invention is directed to oral modified/controlled release drug formulations which provide a rapid initial onset of effect and a prolonged duration of effect. Preferably, the peak concentration is lower than that provided by the reference standard for immediate release formulations of the drug, and the duration of effect falls rapidly at the end of the dosing interval.

Cultural and Institutional Determinants of Bilateral Trade Flows

This paper studies the intangible costs of international trade by extending the basic gravity equation with measures of cultural and institutional distance, and institutional quality. Analyzing a sample of bilateral trade flows between 92 countries in 1999, we find that institutional distance has a negative effect on bilateral trade, presumably because the transaction costs of trade between partners from dissimilar institutional settings are high. In contrast, we find that cultural distance has a positive effect on bilateral trade. A potential explanation for this finding is that firms prefer trade to host-country production in culturally distant countries. Finally, we find that the institutional quality of both the importer and exporter increases the amount of bilateral trade.

The Trade-Off between Foreign Direct Investments and Exports: The Role of Multiple Dimensions of Distance

To serve foreign markets, firms can either export or set up a local subsidiary through horizontal Foreign Direct Investment (FDI). The conventional proximity-concentration theory suggests that FDI substitutes for trade if distance between countries is large, while exports become more important if scale economies in production are large. This paper investigates empirically the effect of different dimensions of distance on the choice between exports and FDI. We find that different dimensions of distance affect exports and FDI differently. There is clear evidence of a proximity-concentration trade-off in geographical terms: the share of FDI sales in total foreign sales (exports and FDI sales) increases with geographical distance. The positive relation between import tariffs and FDI intensity provides further evidence for a trade-off resulting from trade costs. On the other hand, the share of FDI decreases with language differences and cultural and institutional barriers. The latter dimensions of distance thus affect FDI more strongly than exports.

The Space of Gravity: Spatial Filtering Estimation of a Gravity Model for Bilateral Trade

Bilateral trade flows traditionally have been analysed by means of the spatial interaction gravity model. Still, (auto)correlation of trade flows has only recently received attention in the literature. This paper takes up this thread of emerging literature, and shows that spatial filtering (SF) techniques can take into account the autocorrelation in trade flows. Furthermore, we show that the use of origin and destination specific spatial filters goes a long way in correcting for omitted variable bias in an otherwise standard empirical gravity equation. For a cross-section of bilateral trade flows, we compare an SF approach to two benchmark specifications that are consistent with theoretically derived gravity. The results are relevant for a number of reasons. First, we correct for autocorrelation in the residuals. Second, we suggest that the empirical gravity equation can still be considered in applied work, despite the theoretical arguments for its misspecification due to omitted multilateral resistance terms. Third, if we include SF variables, we can still resort to any desired estimator, such as OLS, Poisson or negative binomial regression. Finally, interpreting endogeneity bias as autocorrelation in regressor variables and residuals allows for a more general specification of the gravity equation than the relatively restricted theoretical gravity equation. In particular, we can include additional country-specific push and pull variables, besides GDP (e.g., land area, landlockedness, and per capita GDP). A final analysis provides autocorrelation diagnostics according to different candidate indicators.

Institutions, Governance and International Trade: Opening the Black Box of OECD and GDP per Capita Effects in Gravity Equations

Ineffective institutions and bad governance increase transaction costs and reduce international transport flows. In this paper, we empirically investigate this basic notion, and we show that it can account for several, so far, somewhat puzzling results in the empirical literature estimating gravity equations of bilateral trade. More specifically, we show that differences in the quality and effectiveness of institutions offer an explanation for the tendency of OECD countries to trade disproportionately with each other, and with non-OECD countries, as well as for the positive effect of GDP per capita on bilateral trade.

Economic Development, Institutions and Trust

Economists increasingly recognize institutions and generalized trust as key determinants of differences in economic performance and development of regions and nations. This paper describes the microeconomic foundations of the concept of social capital. It describes the emergence of trust and the problems that emerge when linking trust to macroeconomic performance indicators. We argue that although the importance of trust in explaining growth and productivity differences is evident, an at least equally important question is how trust emerges. Combining the microeconomic strands of research that focus on the latter question with macroeconomic questions focusing on economic performance can provide important new insights. JEL codes: D23, O1