Conventional versus network dependence panel data gravity model specifications

James LeSage and Manfred Fischer

No 2019/02, Working Papers in Regional Science from WU Vienna University of Economics and Business

Abstract: Past focus in the panel gravity literature has been on multidimensional fixed effects specifications in an effort to accommodate heterogeneity. After introducing conventional multidimensional fixed effects, we find evidence of cross-sectional dependence in flows. We propose a simultaneous dependence gravity model that allows for network dependence in flows, along with computationally efficient Markov Chain Monte Carlo estimation methods that produce a Monte Carlo integration estimate of log-marginal likelihood useful for model comparison. Application of the model to a panel of trade flows points to network spillover effects, suggesting the presence of network dependence and biased estimates from conventional trade flow specifications. The most important sources of network dependence were found to be membership in trade organizations, historical colonial ties, common currency and spatial proximity of countries.

Keywords: origin-destination panel data ows; cross-sectional dependence; log-marginal like- lihood; gravity models of trade; sociocultural distance; convex combinations of interaction matrices (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ecm, nep-geo and nep-int
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