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Information costs, networks and intermediation in international trade

  • Dimitra Petropoulou
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    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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    File URL: http://eprints.lse.ac.uk/19640/
    File Function: Open access version.
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    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19640.

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    Length: 39 pages
    Date of creation: Feb 2008
    Date of revision:
    Handle: RePEc:ehl:lserod:19640
    Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
    Phone: +44 (020) 7405 7686
    Web page: http://www.lse.ac.uk/

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    1. Alessandra Casella & James E. Rauch, 1997. "Anonymous Market and Group Ties in International Trade," NBER Working Papers 6186, National Bureau of Economic Research, Inc.
    2. Biglaiser, Gary & Friedman, James W., 1994. "Middlemen as guarantors of quality," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 509-531, December.
    3. James E. Anderson & Douglas Marcouiller, S.J., 1999. "Insecurity and the Pattern of Trade: An Empirical Investigation," Boston College Working Papers in Economics 418, Boston College Department of Economics, revised 03 Aug 2000.
    4. Richard Portes & Hélène Rey, 2001. "The Determinants of Cross-Border Equity Flows," DELTA Working Papers 2001-08, DELTA (Ecole normale supérieure).
    5. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 131-159, June.
    6. Yavas, Abdullah, 1994. "Middlemen in Bilateral Search Markets," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 406-29, July.
    7. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
    8. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December.
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