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Does the Gravity Model Suffer from Selection Bias?

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  • Haq, Zahoor Ul
  • Meilke, Karl D.
  • Cranfield, John A.L.

Abstract

When analyzing bilateral trade flow data, zero trade flows are quite common and problematic when a gravity equation is estimated with a log-linear functional form. This has caused many researchers to either ignore the zero trade flows or to replace zero with a small positive number. Both of these actions bias the resulting parameter estimates of the gravity equation. In this study we correct for this misspecification by using the Heckman selection model to estimate the bilateral trade flows for 46 agrifood products, for the period 1990 to 2000, for 52 countries. In our sample, selection bias rarely affects the signs of variables but often has a substantial effect on the magnitude, statistical significance and economic interpretation of the marginal effects. Hence, treating zero trade flows properly is important from both a statistical and an economics perspective.----------------------------------------------------------------------Revised and published as: Haq, Zahoor Ul, Karl Meilke and John Cranfield. 2013. “Selection bias in a gravity model of agrifood trade.” European Review of Agricultural Economics 40(2):331-360.

Suggested Citation

  • Haq, Zahoor Ul & Meilke, Karl D. & Cranfield, John A.L., 2010. "Does the Gravity Model Suffer from Selection Bias?," Working Papers 90884, Canadian Agricultural Trade Policy Research Network.
  • Handle: RePEc:ags:catpwp:90884
    DOI: 10.22004/ag.econ.90884
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    References listed on IDEAS

    as
    1. Hummels, David, 1999. "Toward a Geography of Trade Costs," Working papers 283448, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    2. Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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    Cited by:

    1. Rahul Sen & Sadhana Srivastava & Don J Webber, 2015. "Effects of preferential trade agreements in the presence of zero trade flows: the cases of China and India," Working Papers 20151507, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    2. Rahul Sen & Sadhana Srivastava & Don Webber, 2015. "Preferential trading agreements and the gravity model in presence of zero and missing trade flows: Early results for China and India," Working Papers 2015-02, Auckland University of Technology, Department of Economics.
    3. Estrella Gómez-Herrera, 2013. "Comparing alternative methods to estimate gravity models of bilateral trade," Empirical Economics, Springer, vol. 44(3), pages 1087-1111, June.
    4. Haq, Zahoor Ul & Meilke, Karl D. & Cranfield, John A.L., 2011. "The Gravity Model and the Problem of Zero's in Agrifood Trade," Working Papers 116851, Canadian Agricultural Trade Policy Research Network.
    5. Cairns, Alexander P. & Meilke, Karl D., 2012. "Canadian Agrifood Export Performance and the Growth Potential of the BRICs and Next-11," Working Papers 142372, Canadian Agricultural Trade Policy Research Network.
    6. Milan Bednář, 2019. "Obchodně-politické překážky vývozu zboží z Evropské unie do USA: význam liberalizace obchodních toků [Trade Policy Barriers to Imports of EU Goods to the USA: Importance of Liberalization of Trade ," Politická ekonomie, Prague University of Economics and Business, vol. 2019(3), pages 231-252.

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    More about this item

    Keywords

    Agricultural and Food Policy; Demand and Price Analysis; International Relations/Trade;
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