Two-way models for gravity
Abstract
Empirical models for panel data frequently feature fixed effects in both directions of the panel. Settings where this is prevalent include student-teacher interaction, the allocation of workers to firms, and the import-export flows between countries.
Estimation of such fixed-effect models is difficult. We derive moment conditions for models with multiplicative unobservables and fixed effects and use them to set up generalized method of moments estimators that have good statistical properties. We estimate a gravity equation with multilateral resistance terms as an application of our methods.
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