DP10787 Estimating the Extensive Margin of Trade

Author(s): J.M.C Santos Silva, Silvana Tenreyro, Kehai Wei
Publication Date: August 2015
Keyword(s): bounded data, extensive margin of trade, number of sectors
JEL(s): C13, C25, F11, F14
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10787

Understanding and quantifying the determinants of the number of sectors or firms exporting in a given country is of relevance for the assessment of trade policies. Estimation of models for the number of sectors, however, poses a challenge because the dependent variable has both a lower and an upper bound, implying that the partial effects of the explanatory variables on the conditional mean of the dependent variable cannot be constant and must approach zero as the conditional mean approaches its bounds. We argue that ignoring these bounds can lead to erroneous conclusions due to the model's mispecification, and propose a flexible specification that accounts for the doubly-bounded nature of the dependent variable. We empirically investigate the problem and the proposed solution, finding significant differences between estimates obtained with the proposed estimator and those obtained with standard approaches.