Trading partners and trading volumes: Implementing the helpman-melitz-rubinstein model empirically

Abstract

Helpman, Melitz and Rubinstein [Quarterly Journal of Economics (2008) Vol. 123, pp. 441-487] (HMR) present a rich theoretical model to study the determinants of bilateral trade flows across countries. The model is then empirically implemented through a two-stage estimation procedure. We argue that this estimation procedure is only valid under the strong distributional assumptions maintained in the article. Statistical tests using the HMR sample, however, clearly reject such assumptions. Moreover, we perform numerical experiments which show that the HMR two-stage estimator is very sensitive to departures from the assumption of homoskedasticity. These findings cast doubts on any inference drawn from the empirical implementation of the HMR model.