Estimating Gravity Coefficients with Multiple Layers of Heterogeneity

We estimate a gravity model for 205 international trading partners over the period 1954-2014, by allowing for multiple layers of heterogeneity. The first layer of heterogeneity arises from the interactions between the gravity variables, and the second one comes from country pairs that differ in values of binary gravity variables. Further layers of heterogeneity come from different income groups and regions. Our results show the importance of considering heterogeneities at various levels. For instance, landlockedness is less restrictive when the trading partners are contiguous; language elasticity of trade is lower when contiguous countries trade, especially when they are also colonially linked. We also find, for example, that the positive interaction between contiguity and landlockedness is more pronounced when the importing countries are not high-income ones. Furthermore, the negative interaction between language and contiguity is more pronounced when the importing countries are from South Asia, while the negative interaction between contiguity and colonial links is stronger when the importing countries are from Sub-Saharan Africa