Search and Deliberation in International Exchange: Microfoundations to Some Macro Patterns

Abstract

In this era of globalization how do we explain the “home bias,” unexpectedly large distance effects, and lagged adjustment patterns visible in international exchange? In this paper, I argue that in the real world, the identity and reliability of potential exchange partners are seldom the data that most economists take them to be. In fact, firms confront formidable problems of search and deliberation. In these circumstances, firms' social networks can provide a key recourse. Yet, for historical reasons, most firms' social networks still tend to be local or national. And, absent institutional solutions, even in the face of apparent cross-border economic opportunities, firms' responses appear overly sticky and lagged. I explore these arguments in an empirical study that contrasts multinational and domestic firms' trade responses to changes in real exchange rates.