Working Paper: CEPR ID: DP7696
Authors: Pol Antràs; Arnaud Costinot
Abstract: This paper develops a simple model of international trade with intermediation. We consider an economy with two islands and two types of agents, farmers and traders. Farmers can produce two goods, but in order to sell these goods in centralized (Walrasian) markets, they need to be matched with a trader, and this entails costly search. In the absence of search frictions, our model reduces to a standard Ricardian model of trade. We use this simple model to contrast the implications of changes in the integration of Walrasian markets, which allow traders from different islands to exchange their goods, and changes in the access to these Walrasian markets, which allow farmers to trade with traders from different islands. We find that intermediation always magnifies the gains from trade under the former type of integration, but leads to more nuanced welfare results under the latter, including the possibility of aggregate losses. These welfare losses may be circumvented, however, through policies that discriminate against foreign traders in a way that minimizes the margins charged by domestic traders.
Keywords: Economic integration; Gains from trade; Intermediation; Search frictions
JEL Codes: D2; D3; F10; F15; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| integration of Walrasian markets (wintegration) (F02) | social welfare (I38) |
| intermediation (G00) | matching rate (C52) |
| intermediation (G00) | terms of trade for farmers (Q17) |
| integration of matching markets (mintegration) (C78) | welfare implications (I30) |
| integration of matching markets (mintegration) (C78) | southern traders' bargaining power (L14) |
| unmatched southern farmers (J43) | access to northern traders (N71) |
| matched southern traders (N91) | losses (G33) |
| margins charged by northern traders (F16) | overall welfare outcomes (I31) |