Search Externalities in Firm-to-Firm Trade

March 19, 2021

Preview Citation

Format: Chicago

John A Spray. Search Externalities in Firm-to-Firm Trade, (USA: International Monetary Fund, 2021) accessed December 4, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

I develop a model of firm-to-firm search and matching to show that the impact of falling trade costs on firm sourcing decisions and consumer welfare depends on the relative size of search externalities in domestic and international markets. These externalities can be positive if firms share information about potential matches, or negative if the market is congested. Using unique firm-to-firm transaction-level data from Uganda, I document empirical evidence consistent with positive externalities in international markets and negative externalities in domestic markets. I then build a dynamic quantitative version of the model and show that, in Uganda, a 25% reduction in trade costs led to a 3.7% increase in consumer welfare, 12% of which was due to search externalities.

Subject: Econometric analysis, Imports, International trade, Labor, Labor market frictions, Search models, Taxes, Value-added tax

Keywords: Buyer-supplier search, Consumer welfare, East Africa, Firm-to-Firm Trade, Global, Importing, Imports, Labor market frictions, Search externality, Search models, Search-and-Matching, Transport cost reduction, Value-added tax, VAT Data, Welfare gains from trade

Publication Details

Pages:

80
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/091
Stock No:

WPIEA2021091
ISBN:

9781513572611
ISSN:

1018-5941

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