Information Costs, Networks and Intermediation in International Trade

Abstract

This paper is motivated by the observation that intermediaries play an important role in international trade such that direct trade between producers and consumers is observed alongside indirect trade through intermediaries. A growing body of evidence also documents the importance of information frictions for exporting. The paper examines the matching role of intermediaries through the building of contacts in a market characterised by information frictions. A pairwise matching model with two-sided information asymmetry is developed to analyse the channels through which information costs can affect the pattern of direct and intermediated trade. All traders can match directly through a stochastic matching process but some may match indirectly through an intermediary who invests in establishing a network of contacts. Intermediation is shown to unambiguously raise expected trade volume and welfare by expanding the set of matching technologies available to traders, while convexity in network-building costs with respect to network size gives rise to both direct and indirect trade in equilibrium. The trade pattern depends on the relative responsiveness of the direct and indirect matching technologies to information costs, which for some parameter values generates a non-monotonic relationship between information frictions and trade.