This paper presents a pairwise matching model with two-sided information asymmetry toanalyse the impact of information costs on endogenous network building and matching byinformation intermediaries. The framework innovates by examining the role of informationcosts on incentives for trade intermediation, thereby endogenising the pattern of direct andindirect trade. Intermediation is shown to unambiguously raise expected trade volume andsocial 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 inequilibrium while the pattern of trade is shown to depend on the level of information costs aswell as the relative effectiveness of direct and indirect matching technologies with changinginformation costs. The model sheds light on the relationship between information frictionsand aggregate trade volume, which may be non-monotonic as a result of conflicting effects ofinformation costs on the incentives for direct and indirect trade.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0848.
Find related papers by JEL classification: F10 - International Economics - - Trade - - - General C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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