Integrating Gravity: The Role of Scale Invariance in Gravity Models of Spatial Interactions and Trade
This paper revisits the ubiquitous bi-proportional gravity model and investigates the reasons why different theoretical frameworks may lead to the same empirical formula. The generic gravity equation possesses scale invariance symmetries that const...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2013/01/17206376/integrating-gravity-role-scale-invariance-gravity-models-spatial-interactions-trade http://hdl.handle.net/10986/13161 |
| Summary: | This paper revisits the ubiquitous
bi-proportional gravity model and investigates the reasons
why different theoretical frameworks may lead to the same
empirical formula. The generic gravity equation possesses
scale invariance symmetries that constrain possible
theoretical explanations based on optimal allocation
principles, such as neoclassical or probabilistic
frameworks. These constraints imply that a representative
consumer's utilities must be separable, and that an
entropy model is the only consistent maximum likelihood
allocation of a matrix of flows between origin and
destination. The paper explores the feasibility of wider
classes of non-scale invariant gravity equations, where
gravity is no longer bi-proportional by including nonlinear
interactions between trade costs and fundamental country
factors such as economic size. It shows that such extensions
are feasible but that they do not result in a significant
improvement in the explanatory power of the empirical analysis. |
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