%S TSE Working Paper
%A Koen Jochmans
%A Vincenzo Verardi
%T Instrumental-Variable Estimation Of Exponential Regression Models With Two-Way Fixed Effects With An Application To Gravity Equations
%X This paper introduces instrumental-variable estimators for exponential-regression models that feature two-way fixed effects. These techniques allow us to develop a theory-consistent approach to the estimation of cross-sectional gravity equations that can accommodate the endogeneity of policy variables. We apply this approach to a data set in which the policy decision of interest is the engagement in a free trade agreement. We explore ways to exploit the transitivity observed in the formation of trade agreements to construct instrumental variables with considerable predictive ability. Within a bilateral model, the use of these instruments has strong theoretical foundations. We obtain point estimates of the partial effect of a preferential-trade agreement on trade volume that range between 20% and 30% and find no statistical evidence of endogeneity.
%K Bias correction
%K count data
%K differencing estimator
%K endogeneity
%K fixed effects
%K gravity equation
%K instrumental variable
%K transitivity
%B TSE Working Paper
%V 21-1271
%D 2021
%C Toulouse
%I TSE Working Paper
%L publications44014