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Firm-level Gravity with Fixed Effects

with Uğur Aytun, Cem Özgüzel and Joschka Wanner.

This paper introduces a new method for estimating gravity equations at the firm level by leveraging both firm and country-level trade data. By constructing a flexible estimation strategy that accounts for firm-level and country-level characteristics, in particular for multilateral resistances at origin and destination, we offer a novel approach to measure the impact of policy changes such as tariffs, sanctions, etc., on trade flows. Through a series of simulations and replications of established firm-level gravity estimations, we validate the robustness of our methodology. Our findings not only contribute to the empirical trade literature by providing a more precise analytical tool but also have significant policy implications, highlighting the heterogeneous effects of economic policies on firms within and across countries.

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