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Heterogeneous Firms, Globalisation and the Distance Puzzle
Author(s) -
Larch Mario,
Norbäck PehrJohan,
Sirries Steffen,
Urban Dieter M.
Publication year - 2016
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12303
Subject(s) - ordinary least squares , estimator , globalization , pace , econometrics , economics , zero (linguistics) , estimation , geographical distance , gravity equation , bilateral trade , statistics , mathematics , geodesy , geography , demography , market economy , population , linguistics , management , sociology , archaeology , china , philosophy
Despite the strong pace of globalisation, the distance effect on trade is persistent or even growing over time (Disdier and Head, 2008). To solve this distance puzzle , we use the recently developed gravity equation estimator from H elpman et al. (2008) (HMR henceforth). Using three different data sets, we find that the distance coefficient increases over time when ordinary least squares (OLS ) is used, while the non‐linear estimation of HMR leads to a decline in the distance coefficient over time. The distance puzzle, thus, arises from a growing bias of OLS estimates. The latter is explained by an increase in the importance of the bias from omitting the number of heterogeneous exporting firms relative to the bias from omitting zero trade flows. Furthermore, we show that including zero trade flows cannot solve the distance puzzle when using HMR . The HMR estimates are strongly correlated with the time pattern in freight costs reported by H ummels (2007).