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Journal of Economic Integration 2004 March;19(1) :182-191.
DOI: https://doi.org/10.11130/jei.2004.19.1.182
On the Problem of Endogenous Unobserved Effects in the Estimation of Gravity Models
Peter Egger 
University of Innsbruck
Copyright ©2004 Journal of Economic Integration
ABSTRACT
We propose to estimate gravity models by a Hausman and Taylor (1981) 2SLS error components approach. First, this allows to account for the possible correlation of some of the regressors with the unobserved effects, which has been ignored in previous research. Second and in contrast to the Within estimator, one obtains estimates for the time-invariant variables also in a framework with bilateral effects. We show that distance and country size are important sources of correlation. The properly estimated parameter of distance is about twice as high as its biased GLS counterpart and markedly higher than found by others.
Keywords: Key words : Gravity equation | Panel econometrics
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