Gravity model estimation: fixed effects vs. random intercept Poisson pseudo-maximum likelihood

S. Prehn, Bernhard Brümmer and Thomas Glauben

Applied Economics Letters, 2016, vol. 23, issue 11, 761-764

Abstract: The standard Anderson and van Wincoop gravity model has typically been estimated using a fixed-effects approach. However, a fixed-effects approach has a major drawback: it does not allow for the estimation of exporter- and importer-invariant variables. Thus, at least in a cross-sectional context, economically relevant variables such as exporter and importer gross domestic product are disregarded. We propose a random intercept model to address this gap. For large datasets, this approach not only provides identical estimates like a fixed-effects approach, but also allows for the estimation of exporter- and importer-invariant variables.

Date: 2016
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Working Paper: Gravity Model Estimation: Fixed Effects vs. Random Intercept Poisson Pseudo Maximum Likelihood (2014)
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DOI: 10.1080/13504851.2015.1105916

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