Working Paper: CEPR ID: DP18110
Authors: Francois Fontaine; Julien Martin; Isabelle Mejean
Abstract: We study bilateral trade adjustments in a dynamic Ricardian model of trade with search frictions. The model generates an endogenous network of firm-to-firm trade relationships that displays price bargaining within and across firm-to-firm relationships. Following a foreign shock, firms sourcing inputs from abroad have three options: absorb the shock, renegotiate with their current supplier or switch to a supplier in another country. The relative importance of these adjustment margins depends on the interplay between Ricardian comparative advantages, search frictions and firms' individual characteristics, including the history of the relationship. We exploit French firm-to-firm trade data to estimate the model structurally and quantify the relative importance of these adjustment margins in 26 sectors and 14 EU countries.
Keywords: firm-to-firm trade; search frictions; pass-through
JEL Codes: F10; F11; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search frictions (F12) | trade adjustments (F16) |
| search frictions (F12) | firm characteristics (L20) |
| Ricardian comparative advantages (F11) | trade adjustments (F16) |
| search frictions (F12) | market shares (L17) |
| Ricardian forces (D74) | market shares (L17) |
| French product costs (L11) | bilateral trade value (F10) |
| time (C41) | bargaining power of buyers (L14) |
| firm-to-firm relationships (L14) | prices (P22) |