<p>The issue is that the invention of the steamship is not exogenous to economic development. Assuming that trade exerts positive effects on development, it could be that past trade favored economic development and as result the invention of the steamship. By contrast, wind flows are exogenous.</p>

CC BY-SA 4.0
2018-05-26T22:16:11.430Z
"*...wind flows are exogenous.*" Or so we thought before global warming...
Giskard
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2018-05-26T22:25:02.813Z
Right ;-)! Pascali is safe because he is studying the pre-global warming era!
emeryville
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2018-05-26T21:59:20.280Z
2018-05-26T21:59:20.280Z
emeryville
<p>In The Wind of Change: <a href="https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2014/twerp_1049_pascali.pdf" rel="nofollow noreferrer">Maritime Technology, Trade and
Economic Development (2015)</a>, Pascali estimates various effects on freight rates (i.e. the cost of transport) on outcomes such as trade volumes and economic development. To do this, he exploits a kind of natural experiment that results from the fact that different shipping routes benefit in different ways due to the preexisting wind patterns (i.e. those with wind flows against the route direction).</p>

<p>I guess this controls for demand for shipping, so that freight rates are exogenously affected by transport times. But I don't understand why this is needed to estimate the effects of shipping technology. Isn't the invention of the steamship itself an experiment that allows you to see the effects of shipping technology on trade volume? Why is this additional variation due to asymmetric benefits needed?</p>

<hr>

<p>A typical regression equation used by him is the following:</p>

<p><a href="https://i.sstatic.net/hecBo.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/hecBo.png" alt="enter image description here"></a></p>

<econometrics><international-trade><history>
Pascali (2015) Natural Experiment
user526463
# Pascali (2015) Natural Experiment

(Asked by: username_0 on 2018-05-26)

In The Wind of Change: [Maritime Technology, Trade and
Economic Development (2015)](https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2014/twerp_1049_pascali.pdf), Pascali estimates various effects on freight rates (i.e. the cost of transport) on outcomes such as trade volumes and economic development. To do this, he exploits a kind of natural experiment that results from the fact that different shipping routes benefit in different ways due to the preexisting wind patterns (i.e. those with wind flows against the route direction).

I guess this controls for demand for shipping, so that freight rates are exogenously affected by transport times. But I don't understand why this is needed to estimate the effects of shipping technology. Isn't the invention of the steamship itself an experiment that allows you to see the effects of shipping technology on trade volume? Why is this additional variation due to asymmetric benefits needed?

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A typical regression equation used by him is the following:

[![enter image description here](https://i.sstatic.net/hecBo.png)](https://i.sstatic.net/hecBo.png)

**Tags:** econometrics, international-trade, history

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## 1 answers

### Answer by username_1 on 2018-05-26. Score: 2

The issue is that the invention of the steamship is not exogenous to economic development. Assuming that trade exerts positive effects on development, it could be that past trade favored economic development and as result the invention of the steamship. By contrast, wind flows are exogenous.

> **Comments:**
> **username_2**: "*...wind flows are exogenous.*" Or so we thought before global warming...  
> **username_1**: Right ;-)! Pascali is safe because he is studying the pre-global warming era!  

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