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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. Antras, Pol & Costinot, Arnaud, 2011. "Intermediated Trade," Scholarly Articles 4784024, Harvard University Department of Economics.
  2. Dimitra Petropoulou, 2011. "Information costs, networks and intermediation in international trade," Globalization and Monetary Policy Institute Working Paper 76, Federal Reserve Bank of Dallas.
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  4. Costas Arkolakis, 2008. "Market Penetration Costs and the New Consumers Margin in International Trade," NBER Working Papers 14214, National Bureau of Economic Research, Inc.
  5. Andrew B. Bernard & Marco Grazzi & Chiara Tomasi, 2010. "Intermediaries in International Trade: direct versus indirect modes of export," Department of Economics Working Papers 1016, Department of Economics, University of Trento, Italia.
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  8. Fajgelbaum, Pablo & Grossman, Gene M. & Helpman, Elhanan, 2011. "Income distribution, product quality, and international trade," Policy Research Working Paper Series 5843, The World Bank.
  9. Andrew B. Bernard & Emily J. Blanchard & Ilke Van Beveren & Hylke Y. Vandenbussche, 2012. "Carry-Along Trade," NBER Working Papers 18246, National Bureau of Economic Research, Inc.
  10. Treb Allen, 2012. "Information Frictions in Trade," 2012 Meeting Papers 125, Society for Economic Dynamics.
  11. 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.
  12. 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.
  13. Chaney, Thomas, 2011. "The Network Structure of International Trade," CEPR Discussion Papers 8240, C.E.P.R. Discussion Papers.
  14. 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.
  15. David Hummels & Alexandre Skiba, 2002. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," NBER Working Papers 9023, National Bureau of Economic Research, Inc.
  16. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, August.
  17. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, August.
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