Department of Justice
Institutional Affiliation: Federal Reserve Board
NBER Working Papers and Publications
|February 2014||Gravity and Extended Gravity: Using Moment Inequalities to Estimate a Model of Export Entry|
with Eduardo Morales, Andrés Zahler: w19916
Exporting firms often enter foreign markets that are similar to previous export destinations. We develop a dynamic model in which a firm's exports in a market may depend on how similar the market is to the firm's home country (gravity) and to its previous export destinations (extended gravity). Given the large number of export paths from which forward-looking firms may choose, we use a moment inequality approach to structurally estimate our model. Using data from Chilean exporters, we estimate that having similarities with a prior export destination in geographic location, language, and income per capita jointly reduce the cost of foreign market entry by 69% to 90%. Reductions due to geographic location (25% to 38%) and language (29% to 36%) have the largest effect. Extended gravity thus h...