Working Paper: NBER ID: w15750
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: international trade; intermediation; welfare; market integration
JEL Codes: D3; D4; 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) (D52) | Pareto gains from trade (F11) |
| Increased intermediation (F65) | Improved welfare outcomes (I39) |
| Matching market integration (mintegration) (F02) | More nuanced welfare implications (D69) |
| Matching market integration (mintegration) (F02) | Aggregate welfare losses (D69) |
| Higher bargaining power of northern traders (D40) | Decrease in welfare for matched southern traders (D69) |
| Search frictions and trading externalities (F12) | Welfare losses (D69) |
| Relative bargaining powers and intermediation costs (D40) | Welfare effects of mintegration (D69) |