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Contracting and the Division of the Gains from Trade

Author

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  • Andrew B. Bernard
  • Swati Dhingra

Abstract

This paper examines the microstructure of import markets and the division of the gains from trade among consumers, importers and exporters. When exporters and importers transact through anonymous markets, double marginalization and business stealing among competing importers lead to lower profits. Trading parties can overcome these inefficiencies by investing in richer contractual arrangements such as bilateral contracts that eliminate double marginalization and joint contracts that also internalize business stealing. Introducing these contractual choices into a trade model with heterogeneous exporters and importers, we show that trade liberalization increases the incentive to engage in joint contracts, thus raising the profits of exporters and importers at the expense of consumer welfare. We examine the implications of the model for prices, quantities and exporter-importer matches in Colombian import markets before and after the US-Colombia free trade agreement. US exporters that started to enjoy duty-free access were more likely to increase their average price, decrease their quantity exported and reduce the number of import partners.

Suggested Citation

  • Andrew B. Bernard & Swati Dhingra, 2015. "Contracting and the Division of the Gains from Trade," CEP Discussion Papers dp1381, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1381
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    References listed on IDEAS

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    1. Thomas Chaney, 2014. "The Network Structure of International Trade," American Economic Review, American Economic Association, vol. 104(11), pages 3600-3634, November.
    2. Emily Blanchard & Tatyana Chesnokova & Gerald Willmann, 2013. "Private Labels and International Trade: Trading Variety for Volume," CESifo Working Paper Series 4133, CESifo Group Munich.
    3. Mary Amiti & Jozef Konings, 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia," American Economic Review, American Economic Association, vol. 97(5), pages 1611-1638, December.
    4. Justin Pierce & Peter Schott, 2009. "Concording U.S. Harmonized System Categories Over Time," Working Papers 09-11, Center for Economic Studies, U.S. Census Bureau.
    5. Davide Castellani & Francesco Serti & Chiara Tomasi, 2010. "Firms in International Trade: Importers' and Exporters' Heterogeneity in Italian Manufacturing Industry," The World Economy, Wiley Blackwell, vol. 33(3), pages 424-457, March.
    6. Philippe Aghion & Rachel Griffith & Peter Howitt, 2006. "Vertical Integration and Competition," American Economic Review, American Economic Association, vol. 96(2), pages 97-102, May.
    7. repec:hrv:faseco:34330170 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Defever, Fabrice & Fischer, Christian & Suedekum, Jens, 2016. "Relational contracts and supplier turnover in the global economy," Journal of International Economics, Elsevier, vol. 103(C), pages 147-165.
    2. Eguia, Jon X. & Llorente-Saguer, Aniol & Morton, Rebecca & Nicolò, Antonio, 2018. "Equilibrium selection in sequential games with imperfect information," Games and Economic Behavior, Elsevier, vol. 109(C), pages 465-483.
    3. Johannes Boehm & Jan Sonntag, 2018. "Vertical Foreclosure in the Global Production Network," 2018 Meeting Papers 677, Society for Economic Dynamics.
    4. Raff, Horst & Schmitt, Nicolas, 2015. "Retailing and international trade: A survey of the literature," Economics Working Papers 2015-02, Christian-Albrechts-University of Kiel, Department of Economics.
    5. Jim H. Shen & Leilei Shen & Jun Zhang, 2018. "Endowment Structure, Industry dynamics and Vertical Production Structure in China-Theory and Evidence," Working Papers 215, Department of Economics, SOAS, University of London, UK.
    6. Swati Dhingra, 2016. "Piggy-Back Exporting, Intermediation, and the Distributional Gains from Trade in Agricultural Markets," 2016 Meeting Papers 712, Society for Economic Dynamics.
    7. Johannes Boehm & Jan Sonntag, 2018. "Vertical Integration and Foreclosure: Evidence from Production Network Data," Sciences Po publications 2018-12, Sciences Po.
    8. repec:bla:reviec:v:26:y:2018:i:4:p:784-800 is not listed on IDEAS

    More about this item

    Keywords

    Heterogeneous firms; exporters; importers; vertical integration; contracts; consumer welfare;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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