Contracting and the Division of the Gains from Trade

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.

Relational contracts and supplier turnover in the global economy

“…, where δ is the previously derived critical discount factor given in (10). Put differently, very patient agents with a discount factor above δ/(1 − P ) would always form a RC, both with the initial high-cost and with the final low-cost supplier.…”

“…The share of low-cost suppliers in the universe of potential suppliers, and thus the probability to find such a partner in every round of re-matching is denoted by P . 10 Second, we assume that the headquarter must re-match when she decides to engage in costly search, even when the supplier she encounters is less efficient than her current partner.…”

Essays on Aggregate Fluctuations, Network Dynamics and Statistical Regularities in Economics

“…It is noteworthy that similar results have been reported byBernard and Dhingra (2016) who analyzes the consequences of the US-Colombia Free Trade Agreement on firm-to-firm matching, finding that US exporters increased their average prices, reduced their export volume and the number of their import partners in the Colombian market.…”

World Trade Evolution

“…One temptation is to think of this as just another extensive margin of trade. However, firm behavior is important on both sides of any international trade relationship and existing frameworks largely ignore the interaction between buyers and sellers each of whom may have market power (Bernard and Dhingra (2015)). Evidence in this chapter and elsewhere shows that the extensive margins of trade, including that of foreign partners, are important both in the aggregate and within firms.…”