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Information Costs, Networks and Intermediation in International Trade

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  • Dimitra Petropoulou

Abstract

This paper presents a pairwise matching model with two-sided information asymmetry to analyse the impact of information costs on endogenous network building and matching by information intermediaries. The framework innovates by examining the role of information costs on incentives for trade intermediation, thereby endogenising the pattern of direct and indirect trade. Intermediation is shown to unambiguously raise expected trade volume and social welfare by expanding the set of matching technologies available to traders. Moreover, convexity in network-building costs is necessary for both direct and indirect trade to arise in equilibrium while the pattern of trade is shown to depend on the level of information costs as well as the relative effectiveness of direct and indirect matching technologies with changing information costs. The model sheds light on the relationship between information frictions and aggregate trade volume, which may be non-monotonic as a result of conflicting effects of information costs on the incentives for direct and indirect trade.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0848.

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Date of creation: Feb 2008
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Handle: RePEc:cep:cepdps:dp0848

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Related research

Keywords: International Trade; Pairwise Matching; Information Cost; Intermediation; Networks;

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References

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