Handbook of International Economics

Chapter 3

Gravity Equations: Workhorse,Toolkit, and Cookbook*

Keith Head^{a, b} and Thierry Mayer^{b, c, d},    ^aSauder School of Business, University of British Columbia, Canada, ^bCentre for Economic Policy Research, London, UK, ^cSciences-Po, Paris, France, ^dCentre d’études prospectives et d’informations internationales, France

Abstract

This chapter focuses on the estimation and interpretation of gravity equations for bilateral trade. This necessarily involves a careful consideration of the theoretical underpinnings since it has become clear that naive approaches to estimation lead to biased and frequently misinterpreted results. There are now several theory-consistent estimation methods and we argue against sole reliance on any one method and instead ...