Persistent zeros: The extensive margin of trade

Julian Hinz, Amrei Stammann and Joschka Wanner

No 2139, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The extensive margin of bilateral trade exhibits a high level of persistence that cannot be explained by geography or trade policy. We combine a heterogeneous firms model of international trade with bounded productivity with features from the firm dynamics literature to derive expressions for an exporting country's participation in a specific destination market in a given period. The model framework asks for a dynamic binary choice estimator with two or three sets of high-dimensional fixed effects. To mitigate the incidental parameter problem associated with nonlinear fixed effects models, we characterize and implement suitable bias corrections. Extensive simulation experiments confirm the desirable statistical properties of the bias-corrected estimators. Empirically, taking two sources of persistence - true state dependence and unobserved heterogeneity - into account using a dynamic specification, along with appropriate fixed effects and bias corrections, changes the estimated effects considerably: out of the most commonly studied potential determinants (joint WTO membership, common regional trade agreement, and shared currency), only sharing a common currency retains a significant effect on whether two countries trade with each other at all in our preferred estimation.

Keywords: high-dimensional fixed effects; dynamic panel model; binary choice; incidental parameter bias correction; trade policy (search for similar items in EconPapers)
JEL-codes: C13 C23 C55 F14 F15 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ecm and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: State Dependence and Unobserved Heterogeneity in the Extensive Margin of Trade (2021)
Working Paper: State Dependence and Unobserved Heterogeneity in the Extensive Margin of Trade (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:2139

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