Gravity with Granularity

Holger Breinlich, Harald Fadinger, Volker Nocke and Nicolas Schutz

No 15374, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We demonstrate that the estimation of gravity equations of trade flows suffers from an omitted variable bias when firms are granular and behave oligopolistically. We show how to correct for this bias in the estimation of both firm- and industry-level gravity. Using French and Chinese export data, we find that the oligopoly bias leads to a substantial underestimation of the effects of distance on trade flows. In a calibrated version of the model, the welfare gains from a trade liberalization are found to be almost twice as large under oligopoly as under monopolistic competition.

Keywords: Gravity equation; Oligopoly; Ces demand; Aggregative game (search for similar items in EconPapers)
JEL-codes: F12 F14 L13 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-bec and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Gravity With Granularity (2025)
Working Paper: Gravity with granularity (2021)
Working Paper: Gravity with granularity (2021)
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