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Goods-market frictions and international trade

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  • Krolikowski, Pawel M.
  • McCallum, Andrew H.

Abstract

We add goods-market frictions to a general equilibrium dynamic model with heterogeneous exporting producers and identical importing retailers. Our tractable framework leads to endogenously unmatched product varieties that reduce welfare, attenuate welfare responses, increase the responsiveness of trade to iceberg costs, and operate mainly through the extensive margin. Quantitative results based on U.S. and Chinese data suggest that reducing international search costs to their domestic levels raises U.S. and Chinese welfare by 5.6% and 4%, respectively. A model with search frictions attenuates ex-ante welfare responses by 85% and changes the trade elasticity from −3.2 to −5.5 relative to a model without search frictions. The trade elasticity with respect to search costs is −0.7 and search frictions make the intensive and extensive margins of trade with respect to variable costs about equally important. Our framework provides a baseline for analyzing the aggregate implications of search frictions in models of trade.

Suggested Citation

  • Krolikowski, Pawel M. & McCallum, Andrew H., 2021. "Goods-market frictions and international trade," Journal of International Economics, Elsevier, vol. 129(C).
  • Handle: RePEc:eee:inecon:v:129:y:2021:i:c:s0022199620301264
    DOI: 10.1016/j.jinteco.2020.103411
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    Cited by:

    1. Andrew B. Bernard & Andreas Moxnes, 2018. "Networks and Trade," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 65-85, August.
    2. Jaerim Choi, 2020. "Two-Sided Heterogeneity, Endogenous Sharing, and International Matching Markets," Working Papers 202006, University of Hawaii at Manoa, Department of Economics.
    3. Spray, J., 2101. "Search Externalities in Firm-to-Firm Trade," Cambridge Working Papers in Economics 2108, Faculty of Economics, University of Cambridge.
    4. Brancaccio, Giulia & Kalouptsidi, Myrto & Papageorgiou, Theodore, 2020. "A guide to estimating matching functions in spatial models," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    5. Giulia Brancaccio & Myrto Kalouptsidi & Theodore Papageorgiou, 2020. "Geography, Transportation, and Endogenous Trade Costs," Econometrica, Econometric Society, vol. 88(2), pages 657-691, March.
    6. Lincoln, William F. & McCallum, Andrew H., 2018. "The rise of exporting by U.S. firms," European Economic Review, Elsevier, vol. 102(C), pages 280-297.
    7. Clemence Lenoir & Isabelle Mejean & Julien Martin, 2018. "Search Frictions in International Good Markets," 2018 Meeting Papers 878, Society for Economic Dynamics.

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    More about this item

    Keywords

    Search; Welfare; Trade elasticity; Constrained optimization;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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