Working Paper Series
Heterogeneous Firms, Globalization and the Distance Puzzle
(), Pehr-Johan Norbäck
(), Steffen Sirries
() and Dieter Urban
Abstract: Despite the strong pace of globalization, the distance
effect on trade is persistent or even growing over time (Disdier and Head,
2008). To solve this distance puzzle, we use the recently developed gravity
equation estimator from Helpman, Melitz and Rubinstein (2008), HMR
henceforth. Using three different data sets, we find that the distance
coefficient increases over time when OLS is used, while the non-linear
estimation of HMR leads to a decline in the distance coefficient over time.
The distance puzzle thus arises from a growing bias of OLS estimates. The
latter is explained by globalization more significantly reducing the
downward bias from omitting zero trade flows than it reduces the upward
bias from omitting the number of heterogeneous exporting firms.
Furthermore, we show that including zero-trade flows cannot solve the
distance puzzle when using HMR. The HMR estimates are strongly correlated
with the time pattern in freight costs reported by Hummels (2007).
Keywords: Distance puzzle; Gravity estimation; Zero trade flows; Firm heterogeneity; (follow links to similar papers)
JEL-Codes: F13; F14; F23; (follow links to similar papers)
43 pages, March 5, 2013
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