Rotterdam Brown Bag Seminars General Economics

Megan Haasbroek (Erasmus University Rotterdam)
Wednesday, 23 May 2018

Abstract: Motivated by the pertinence of matching frictions in international trade, I show how intermediaries are able to mitigate these frictions in a general equilibrium setting. In my model, firms need to engage in informative advertising to reach foreign consumers. An intermediary has two advantages in exporting compared to manufacturing firms: (i) they profit from economies of scope and (ii) they are more efficient in reaching consumers. I show how incorporating intermediaries in a heterogeneous-firm setting with endogenous market penetration generates productivity sorting in the export mode. That is, the most productive firms export directly, the least productive firms do not export at all and the moderately productive firms use an intermediary. Intermediaries make up a higher share of exports when the costs of exporting are higher and when they have a larger comparative advantage in marketing. Preliminary assessments show that, for sufficiently low costs of intermediation, the presence of intermediaries induces an increase in both welfare and total trade flows. Finally, I demonstrate how trade liberalization gives rise to a novel composition effect, which reduces the diversity of products in the intermediary’s portfolio.