I am trying to build a gravity model with the Global Value Chains indicator (backward and forward participation) as dependent variables. However, I wonder which are the diagnostic tests I should implement to correctly specify the model and to decide the estimator. I know that the literature recommends using the Pseudo Poisson Maximum Likelihood (PPML) estimator in case of trade because of the larges amount of zeros and log-variables issues. However, Global Value Chains indicators do not contain a considerable amount of zeros values and they are expressed in percentages (hence, I will not take the log). The literature does not provide many clues and I hope you will help with this dilemma.

Any suggestion is warmly appreciated Best regards

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    $\begingroup$ When using acronyms pls. follow standard conventions and write entire words first time acronym is used. That is: WUAPFSCAWEWFTAIU. TU. $\endgroup$ – Jesper Hybel Jun 10 at 16:37
  • $\begingroup$ Dear Hybel, I apologize. I edited the post writing the entire words. $\endgroup$ – Alessio Jun 11 at 7:01
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    $\begingroup$ Ok, thank you. I think your question is a little unclear. First of all you raise the quite general question which diagnostic tests to run when doing a gravity models? But on the other hand you are discussing the problem of "many zeros". In any case a regression model and a PPML model are non-nested models so comparison could be made on information criteria or you could look at the consequences model choice have for the statistic you are interested in. Since you neither write up model nor statistic of interest it is hard to say something specific. $\endgroup$ – Jesper Hybel Jun 11 at 9:30
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    $\begingroup$ There are several hands on guides written for application of gravity models be that within trade, transport or migration. Here is one place to begin: cran.r-project.org/web/packages/gravity/vignettes/… (also last reference in reference list of this post is very hands on with). But again hard to say if this adresses the specifics you are facing. $\endgroup$ – Jesper Hybel Jun 11 at 9:34
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    $\begingroup$ For migration a begining could be this reference wol.iza.org/uploads/articles/239/pdfs/… again providing a reference to a hands on guide for gravity models in migration: Beine, M., S. Bertoli, and J. Fernández-Huertas Moraga. “A practitioner’s guide to gravity models of international migration.” $\endgroup$ – Jesper Hybel Jun 11 at 9:37

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