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

Koen Jochmans and Vincenzo Verardi
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Vincenzo Verardi: University of Namur

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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 equatio; Instrumental variable; Transitivity. (search for similar items in EconPapers)
Date: 2022-08-23
New Economics Papers: this item is included in nep-int
Note: View the original document on HAL open archive server: https://hal.science/hal-03818773v1
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Published in Journal of Applied Econometrics, 2022, 37 (6), pp.1121-1137. ⟨10.1002/jae.2932⟩

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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 (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03818773

DOI: 10.1002/jae.2932

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