Estimating Gravity Equations: Theory Implications, Econometric Developments, and Practical Recommendations

Abstract

ABSTRACT We trace the developments in the empirical trade literature to make fifteen recommendations for estimating gravity equations, which are structured in three categories: data, estimating equation, and heterogeneity. We also offer practical tips and identify areas where further research is needed. Based on these recommendations, we specify a comprehensive estimating model, which can serve as a benchmark for gravity estimations even when it is not possible to implement all of our recommendations. The proposed methods should be useful for gravity estimations beyond international trade, e.g., migration, foreign investment, cross‐border patenting, and other flows.