Estimating the extensive margin of trade

Understanding and quantifying the determinants of the number of sectors or firms exporting in a given country is of relevance for the assessment of trade policies. Estimation of models for the number of sectors, however, poses a challenge because the dependent variable has both a lower and upper bound, implying that the partial effects of the explanatory variables on the conditional mean of the dependent variable cannot be constant and must approach zero as the dependent variable approaches the bounds. We argue that ignoring these bounds by using OLS or count-data models that ignore the upper bound can lead to erroneous conclusions due to the model’s misspecification. We propose a flexible specification that accounts for the doubly-bounded nature of the dependent variable. We empirically investigate the problem and the proposed solution, and find significant differences between estimates obtained with the proposed estimator and those obtained with standard approaches. JEL Classification codes: C13; C25; C51; F11, F14.