NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Gravity and Extended Gravity: Using Moment Inequalities to Estimate a Model of Export Entry

Eduardo Morales, Gloria Sheu, Andrés Zahler

NBER Working Paper No. 19916
Issued in February 2014, Revised in June 2017
NBER Program(s):International Trade and Investment

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 has a large impact on export entry costs.

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Document Object Identifier (DOI): 10.3386/w19916

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