Working Paper: CEPR ID: DP10919
Authors: 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.
Keywords: Consumer welfare; Contracts; Exporters; FTA; Heterogeneous firms; Importers; Vertical integration
JEL Codes: F10; F12; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade liberalization (F13) | increased joint contracts (D86) |
| increased joint contracts (D86) | higher consumer prices (D19) |
| Trade liberalization (F13) | higher consumer prices (D19) |
| Trade liberalization (F13) | reduced quantities exported (F14) |
| Trade liberalization (F13) | fewer import partners (F10) |