How does Data Aggregation Impact Elasticity of Substitution Estimation? Evidence from a New Elasticity Database

This paper uses a new elasticity of substitution database, estimated with variation in trade costs, to compare elasticities across different levels of data aggregation and regression types. We find that the OLS estimates in our database tend to be smaller than the PPML estimates on average. We also find that the magnitude of the elasticities estimated using aggregated data tend to be smaller than the elasticities estimated using disaggregated data. Additionally, we aggregate the disaggregated elasticity estimates with trade weights and compare them to the corresponding elasticities estimated with the aggregated data. The estimates aggregated by trade weight are on average larger than the estimates from the regression on the aggregated data. The estimates from the aggregate data may exhibit heterogeneity bias, implying that the trade-weighted estimates could be a better representation of the elasticities of substitution for aggregated product groups.