A simple solution to the distance puzzle: balanced data and Poisson estimation

We propose the use of a balanced panel data set and Poisson regression as a solution to the distance puzzle. Employing annual data for the period 1972–2010, we confirm the existence of the puzzle by applying OLS regression to both an unbalanced panel data set and a narrowly defined balanced panel. We find that Poisson regression remedies the distance puzzle, producing a constant trend for the distance coefficient when the unbalanced panel is examined and a positive trend for the balanced data. The findings confirm the common intuition that the influence of transport costs on trade flows has decreased over time.