The tails of gravity: Using expectiles to quantify the trade-margins effects of economic integration agreements

Abstract

Although there is evidence suggesting that the effects of trade liberalizations likely vary across the distribution of trade flows, trade economists have focused almost entirely on conditional mean estimates of their trade elasticities. We propose the novel use of Poisson-based expectile regressions to estimate the heterogeneous effects of trade liberalizations across the entire conditional distribution. Like standard Poisson regression, this method does not need the dependent variable to be logged, accommodates a mass of observations at zero, and is easy to implement, allowing the estimation of gravity equations with the standard three-way fixed effects specification. Using the proposed estimator, we find systematic evidence that trade liberalizations have larger effects at the lower tail of the conditional distribution. We then use the proposed method to investigate the causes of this heterogeneity, and our results suggest that the success of trade liberalizations strongly depends on potential for expansions along the extensive margin.