New Horizons in International Business series
Edited by Jean-Louis Mucchielli and Thierry Mayer
Chapter 3: Trade, border effects and individual characteristics: a panel specification with instrumental variables estimators
3. Trade, border eﬀects and individual characteristics: a panel speciﬁcation with instrumental variables estimators José De Sousa and Anne-Célia Disdier INTRODUCTION 3.1 Although trade ﬂows are growing and tariﬀ and non-tariﬀ barriers are decreasing worldwide, borders still inﬂuence the pattern of commercial transactions. This fact is highlighted by the border eﬀects methodology which oﬀers an evaluation of the borders’ impact on trade (McCallum, 1995; Helliwell, 1996; Wei, 1996; Wolf, 1997; Head and Mayer, 2000).1 Size for size and distance for distance, the trade within a given geographical unity (area, country, and so on) appears higher than that observed with a given external partner. Measures of border eﬀects are generally carried out with ordinary least squares (OLS) regressions. These estimations are sometimes conducted using the Heckman’s correction in order to take into account null ﬂows (Head and Mayer, 2000; 2002). The objective of this chapter is to wonder about the relevance of such an econometric approach and test the robustness of the results obtained from the OLS estimates. In fact, cross-section estimations tend to ignore the unobservable characteristics2 of bilateral trade relations, such as historical, cultural and linguistic links or the presence of minorities. The existence of a potential correlation between these unobservable characteristics and a subset of the explanatory variables runs the risk of obtaining biased estimates. The traditional method to eliminate this correlation consists in using the within estimator. In transforming the data into deviations from individual means, the within estimator...
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