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Information costs, networks and intermediation in international trade


  • Petropoulou, Dimitra


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.

Suggested Citation

  • Petropoulou, Dimitra, 2008. "Information costs, networks and intermediation in international trade," LSE Research Online Documents on Economics 19640, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:19640

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    References listed on IDEAS

    1. Portes, Richard & Rey, Helene, 2005. "The determinants of cross-border equity flows," Journal of International Economics, Elsevier, vol. 65(2), pages 269-296, March.
    2. Yavas, Abdullah, 1994. "Middlemen in Bilateral Search Markets," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 406-429, July.
    3. James E. Anderson & Douglas Marcouiller, 2002. "Insecurity And The Pattern Of Trade: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 342-352, May.
    4. Casella, Alessandra & Rauch, James E., 2002. "Anonymous market and group ties in international trade," Journal of International Economics, Elsevier, vol. 58(1), pages 19-47, October.
    5. Biglaiser, Gary & Friedman, James W., 1994. "Middlemen as guarantors of quality," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 509-531, December.
    6. 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.
    7. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
    8. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 131-159, June.
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    Cited by:

    1. Krautheim, Sebastian, 2012. "Heterogeneous firms, exporter networks and the effect of distance on international trade," Journal of International Economics, Elsevier, vol. 87(1), pages 27-35.
    2. Bogang Jun & Aamena Alshamsi & Jian Gao & Cesar A Hidalgo, 2017. "Relatedness, Knowledge Diffusion, and the Evolution of Bilateral Trade," Papers 1709.05392,

    More about this item


    International Trade; Pairwise Matching; Information Cost; Intermediation; Networks;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory


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