Stochastic Trade Networks

The paper develops a simple model to describe the dynamics of international trade flows. We show that such a setup is able to simultaneously match a large number of empirical regularities, such as the fraction of zero trade flows across pairs of countries, the positive relationship between intensive and extensive margins, the high concentration of trade with respect to both products and destinations. Our network model can thus be considered a useful stochastic benchmark for international trade theories. In particular, our stochastic approach is fully compatible with recent international trade models with heterogeneous firms. Our findings suggest that incorporating stochastic elements into standard trade models can improve their ability to explain relevant stylized facts of world trade.