Dissecting Gravity: From Customs Forms to Country-Level Trade Flows
by Dmitry Livdan
Using a novel data set for Russian exporters allowing for the exact firm-to-firm distances, this project investigates the micro-foundations of gravity by testing at all levels of trade flows: individual cargo, firm, and country. We find that distance does a poor job explaining variation in individual cargo values as most of its explanatory power is absorbed by the recipient fixed effects and transportation dummies. At the firm level the export value increases/decreases with distance with/without the recipient fixed effects in the gravity specification. In addition, the classic gravity holds at the country level in spite of Chaney (2016) gravity sufficiency conditions being violated for Russian exporters. To rationalize these findings, we propose that for gravity to hold at the country level, the firm-level level extensive trade margin -- the number of shipments -- has to decline faster than the intensive trade margin -- value-per-shipment -- increases with distance. We develop a network based model of firm-to-firm trade to support our empirical evidence.