Trade Intermediation and the Organization of Exporters

Abstract

AbstractEmpirical papers show that successful exporting firms either use unaffiliated foreign trade intermediaries or own foreign wholesale subsidiaries. However, conventional trade theory models assume that producers can directly access foreign consumers. We introduce intermediaries in an international trade model where producers differ with respect to productivity as well as regarding their varieties' perceived quality and tradability. Trade intermediation is prone to frictions owing to the absence of enforceable cross‐country contracts while own wholesale subsidiaries require additional capital investment. The sorting pattern of firms depends on their degree of competitive advantage; the equilibrium prevalence of intermediation in the industry depends negatively on the heterogeneity among producers, and the market‐specificity of goods, and positively on expropriation risk. Using sectoral US export data by destination country, we confirm the empirical validity of these predictions.