using domestic prices as a proxy for export prices for over 30 years.<sup>29</sup> Nevertheless, we acknowledge that export prices may deviate from domestic prices for a number of reasons. For example, domestic producers may use different pricing strategies in foreign markets or absorb some of the fluctuations of exchange rates into their mark-ups. Perhaps of greater concern is evidence in research such as Iacovone and Javorcik (2009) that the unit values of goods that are exported are higher than those products sold only domestically, suggesting that exported products are on average higher quality. Should our proxy variable for domestic prices be biased upward, our estimate of the coefficient _ξ_ 2 will also be biased upward. Nevertheless, we have checked that specifications that omit the price wedge term (<sup>_<u>pw,BR</u>_)fromequation(11)producecoefficientsof</sup> _p_<sup>_BR_</sup> similar magnitude to those reported in Tables 4 and 5 below.

Because export data from the respondent country is not available for all HS-06 products, we use the same procedure to calculate our proxy for domestic prices. This forces us to drop an additional 15 disputes in which the respondent’s export volume data is not available for at least 80 percent of the HS-06 codes.<sup>30</sup> Finally, the elasticity data used to estimate equation (12) is derived from Crowley and Yu (2013). Crowley and Yu (2013) estimate import demand and export supply elasticities for a sample of 11 countries by HS-06 codes between the years 1988 and 2012. Their estimates are calculated using the structural estimator originally proposed in Broda and Weinstein (2006) and further developed in Soderbery (2015). Dispute-level estimates of elasticities are calculated using a trade value weighted average of the HS-06 product elasticities associated with each dispute. The Crowley-Yu elasticities are unavailable for the HS-06 product and/or complainant countries for approximately 30 percent of our sample. In these cases we approximate the elasticities using the median elasticity in the product line of all other countries within the complainant country’s World Bank income group.<sup>31</sup> Table 2 provides summary statistics for the variables used in the econometric analysis.

# **4.3 Instrumental variables estimation**

Ordinary least squares estimates of our parameters will be biased by our exclusion of unobserved shocks to both the export supply and import demand curve of the products under investigation. For example, market-based shocks that occur between the politically optimal and best response year would be correlated with both the change in the world price ( _ln_ ( _p_<sup>_w,PO_</sup> _grc_ ) _− ln_ ( _p_<sup>_w,BR_</sup> _grc_ )) and volume of imports ( _ln_ ( _Mgrc_<sup>_PO_)</sup><sup>_−ln_(</sup><sup>_M_</sup> _grc_<sup>_BR_)).Tocorrectforthisbias,weproposetoinstrumentfor</sup> _<u>grc</u>_ our key variables of interest, _ln_ ( _p_<sup>_w,PO_</sup> _grc_ ) _− ln_ ( _p_<sup>_w,BR_</sup> _grc_ ) and _ln_ (<sup>_<u>p</u>_</sup> _p_<sup>_w,BRBR_</sup> _grc_<sup>_M_</sup> _grc_<sup>_BR_),usingvariablesthatare</sup> correlated with these key variables but uncorrelated with the error term ( _νgrc_ ).

> 29Statistics Canada, “New International Canadian Price Index: A Brief Overview,” accessed at http://unstats.un.org/unsd/tradekb/Knowledgebase/New-Canadian-International-Trade-Price-Index-BriefOverview.

> 30We fail to reject the hypothesis that the means of our key variables of interest in those observations that we drop are identical to those in the final sample, suggesting that this procedure should not introduce unnecessary sample selection bias into our results.

> 31Developing country respondents account for over three-quarters of the disputes in which we have to approximate elasticities, thus inducing more measurement error into this sub-sample of countries.

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