Article

Instrumental-Variable Estimation Of Exponential Regression Models With Two-Way Fixed Effects With An Application To Gravity Equations

Koen Jochmans, and Vincenzo Verardi

Abstract

This paper introduces instrumental-variable estimators for exponential-regression models that feature two-way fixed effects. These techniques allow us to develop a theory-consistent approach to the estimation of cross-sectional gravity equations that can accommodate the endogeneity of policy variables. We apply this approach to a data set in which the policy decision of interest is the engagement in a free trade agreement. We explore ways to exploit the transitivity observed in the formation of trade agreements to construct instrumental variables with considerable predictive ability. Within a bilateral model, the use of these instruments has strong theoretical foundations. We obtain point estimates of the partial effect of a preferential-trade agreement on trade volume that range between 20% and 30% and find no statistical evidence of endogeneity.

Keywords

bias correction; count data; differencing estimator; endogeneity; fixed effects; gravity equatio; , instrumental variable; transitivity.;

JEL codes

  • C23: Panel Data Models • Spatio-temporal Models
  • C26: Instrumental Variables (IV) Estimation
  • F14: Empirical Studies of Trade

Replaces

Koen Jochmans, and Vincenzo Verardi, Instrumental-Variable Estimation Of Exponential Regression Models With Two-Way Fixed Effects With An Application To Gravity Equations, TSE Working Paper, n. 21-1271, November 19, 2021.

Reference

Koen Jochmans, and Vincenzo Verardi, Instrumental-Variable Estimation Of Exponential Regression Models With Two-Way Fixed Effects With An Application To Gravity Equations, Journal of Applied Econometrics, vol. 37, n. 6, July 2022, pp. 1121–1137.

Published in

Journal of Applied Econometrics, vol. 37, n. 6, July 2022, pp. 1121–1137