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A note on implementing gravity datasets with abundant zeros

Jordi Paniagua ()

Economics Bulletin, 2016, vol. 36, issue 1, 268-280

Abstract: This note presents a procedure to construct lighter FDI gravity datasets. The standard estimates using all potential dyads and many zeros are inefficient and present convergence issues. The standard balanced approach overlooks the fact that FDI is highly unbalanced and numerous country pairs rarely show investment activity. An empirical application reveals that our method improves the quality of statistical estimation. Standard datasets underestimate the effect of firm selection and heterogeneity and overestimate the negative effect of distance. Our method to construct gravity datasets reduces the number of zeros and yields unbiased estimates.

Keywords: foreign direct investment; FDI; gravity equation; zeros; dataset; PPML (search for similar items in EconPapers)
JEL-codes: F0 F2 (search for similar items in EconPapers)
Date: 2016-02-21
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