Intra-national trade costs: Assaying regional frictions

Standard gravity variables do well in predicting relative trade costs but fail to capture the level of bilateral trade costs (under-predict for poor countries and over-predict for more developed countries).

“As demonstrated by Egger and Nigai (2015) and Agnosteva et al. (2019), the 'standard gravity variables' (e.g., distance, contiguity, etc.) do well in predicting relative trade costs, however, they fail to capture the level of bilateral trade costs (e.g., they under-predict the bilateral trade costs for the poor countries and over-predict them for the more developed countries).”

Country-pair-industry fixed effects mitigate endogeneity concerns by absorbing all time-invariant bilateral determinants of sectoral trade flows.

“𝜇 j in is a set of country-pair-industry fixed effects, which mitigate endogeneity concerns, compare, Baier and Bergstrand (2007) since they absorb all time-invariant bilateral determinants of sectoral trade flows, compare, Egger and Nigai (2015) and Agnosteva et al. (2019).”