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DECTI Trade Seminar: Gravity and Extended Gravity: Estimating a Structural Model of Export Entry

Location:   MC7-100
Begins:   Jun 05, 2012 12:30
Ends:   Jun 05, 2012 14:00
Contact Person:   Anna Regina Rillo Bonfield

PresenterEduardo Morales, Harvard University 
                     joint with Gloria Sheu, U.S. Department of Justice and Andres Zahler, Harvard University

Abstract: Exporters continuously enter and exit individual foreign markets. Although a given firm's status as an exporter tends to be persistent, the set of destination countries that a firm serves changes frequently. In this paper we empirically examine the determinants of a firm's choice of destination countries and show that their export paths follow systematic patterns. We develop a model of export dynamics where firms decide in each period the countries to which they sell. Our model allows profits from each possible destination country to depend on: (a) how similar it is to the firm's home country (gravity), and (b) how similar it is to other destinations to which the firm has previously exported (extended gravity). Given the enormous number of possible export paths from which firms may choose, conventional estimation approaches based on discrete choice models are unfeasible. Instead, we use a moment inequalities approach. Our inequalities come from applying an analogue of Euler's perturbation method to a discrete choice setting. We show that standard gravity forces have a much larger infuence on sunk costs than on fixed costs of exporting and that extended gravity effects can be substantial.

Paper (pdf - 361k)

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