Bias in Poisson Pseudo-Maximum Likelihood estimation of structural gravity models: how much of a problem for applied research?

Ben Shepherd

Applied Economics Letters, 2025, vol. 32, issue 2, 222-227

Abstract: Theory-consistent (‘structural’) gravity models are commonly used to model bilateral trade. Extensive simulations suggest that the Poisson Pseudo-Maximum Likelihood (PPML) estimator performs well in that setting. However, an influential review by (‘HM’) includes a simulation where PPML exhibits significant bias, which leads them to recommend a toolbox approach, including PPML and other estimators. I show that PPML’s bias is related to the noisiness of the data. A more realistic error variance assumption reveals that even for the same distribution type as HM, PPML’s bias is 4% rather than the 27% they report.

Date: 2025
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DOI: 10.1080/13504851.2023.2264469

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