# **4. Empirical Framework**

To examine the effects of pesticide standards imposed by importing countries on the export decisions of firms in developing countries exploiting the panel dimension, we consider the following specification: �2� ��,�,�,�,� ����� ∗���_����������������,�,�,� ��∗�������,�,�,� ��∗��,�,�,�,� ���,�,�,� ��� ���,�,�,�,� where _c_ is an exporting country, _i_ a firm, _k_ a product, _d_ a destination country, _t_ a year, the dependent variable � is either export participation, entry, or exit defined based on the expanded dataset or log export value or log export quantity defined based on the initial dataset. The variable ���_����������������,�,�,� is defined in Eq. (1), tariff�,�,�,� is the log of 1 plus the bilateral tariff imposed by the destination/importing country _d_ on product _k_ from the exporting country _c_ , and � is an independent and identically distributed (i.i.d.) residual.<sup>28</sup> The vector ��,�,�,�,� includes GDP per capita of the destination country and total exports of product _k_ from export country _c_ in year _t_ in all specifications to control for demand and supply effects.<sup>29</sup> Applying the logic of the gravity equation to sectoral trade is not entirely straightforward; when looking at sectoral trade flows and particularly agricultural goods, the idea that trade flows between _c_ and _d_ in a certain product _k_ are increasing in the exporter country’s GDP is not necessarily warranted. In the monopolistic-competition model, larger countries produce more varieties of goods and that contributes to increasing their trade. That is, they do not necessarily export more of each good but they export more goods. Additional firm characteristics and other variables included in the regressions will be described in Section 5.

A key remark on Eq. (2) concerns the stringent exporting country-firm-productdestination country fixed effects ��,�,�,� - for simplicity designated in what follows as firmproduct-destination fixed effects given that each firm belongs to a single exporting country - that are included and account for unobserved heterogeneity at that very finely disaggregated level, in addition to the year fixed effects ��. Accounting for unobserved heterogeneity at such finely

> 28 Simple average applied tariffs are used for importing country-exporting country pairs for each product and year available in the WITS-TRAINS (Trade Analysis and Information System) database. We interpolate observations to fill in missing years. For cases where applied tariff data is not available for a given importing country-exporting country-product-year cell we replace the missing values with Most Favored Nation (MFN) tariffs of the importing country-product-year or with preferential tariffs of the given importing country-exporting country-product-year for importing country-exporting country pairs which have a preferential tariff agreement. In the export participation regression in Section 5.2 we lose approximately 3% of the observations (13,600) due to the inclusion of tariffs in the regression, as tariff data is missing for 21 agricultural products.

> 29 GDP per capita data in constant USD is obtained for all countries from the World Development Indicators (WDI) database.

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