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Quality Uncertainty and Intermediation in International Trade

  • Kunal Dasgupta
  • Jordi Mondria

Uncertainty about product quality is endemic in international trade. We develop a dynamic, two country model where home producers differ in terms of the quality of the products they sell. This quality is imperfectly observed by foreign consumers initially but known once the product is consumed. We show that this uncertainty generates an information cost of exporting, over and above the usual fixed costs used in standard heterogeneous firm models. We use the model to examine the role played by intermediaries in alleviating quality uncertainty. An intermediation technology involving higher marginal cost but lower fixed cost arises endogenously in our model. We analyze the sorting of exporters into different exporting modes. In the process, we uncover a novel externality of using intermediaries. We go on to study how the equilibrium depends on the degree of product heterogeneity, the level of information and the measure of available intermediaries.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-462.

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Date of creation: 01 Aug 2012
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Handle: RePEc:tor:tecipa:tecipa-462
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  1. Costas Arkolakis & Marc-Andreas Muendler, 2010. "The Extensive Margin of Exporting Products: A Firm-level Analysis," CESifo Working Paper Series 3309, CESifo Group Munich.
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  11. Felbermayr, Gabriel & Jung, Benjamin, 2011. "Trade intermediation and the organization of exporters," Munich Reprints in Economics 20574, University of Munich, Department of Economics.
  12. Gehrig, Thomas, 1993. "Intermediation in Search Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(1), pages 97-120, Spring.
  13. Felbermayr, Gabriel J. & Jung, Benjamin, 2008. "Trade intermediaries, incomplete contracts, and the choice of export modes," Tübinger Diskussionsbeiträge 317, University of Tübingen, School of Business and Economics.
  14. Paravisini, Daniel & Rappoport, Veronica & Schnabl, Philipp & Wolfenzon, Daniel, 2010. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," Working Papers 2010-022, Banco Central de Reserva del Perú.
  15. Macchiavello, Rocco, 2010. "Development Uncorked: Reputation Acquisition in the New Market for Chilean Wines in the UK," CEPR Discussion Papers 7698, C.E.P.R. Discussion Papers.
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  17. Bernardo S. Blum & Sebastian Claro & Ignatius Horstmann, 2010. "Facts and Figures on Intermediated Trade," American Economic Review, American Economic Association, vol. 100(2), pages 419-23, May.
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