DP12141 Geography, Search Frictions and Endogenous Trade Costs

Author(s): Giulia Brancaccio, Myrto Kalouptsidi, Theodore Papageorgiou
Publication Date: July 2017
Keyword(s): Geography, matching function estimation, search frictions, shipping, Trade Costs, Trade Flows, trade imbalances, Transportation
JEL(s):
Programme Areas: Industrial Organization, International Trade and Regional Economics, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12141

We leverage detailed data on vessel movements and shipping contracts to shed new light on world trade costs and trade flows. The data reveal new facts about shipping patterns, and motivate us to build a framework modeling the behavior of exporters and ships. Our framework has two novel features: (i) trade costs are endogenous and determined jointly with trade flows; as a result, they depend on the entire network of countries; (ii) search frictions between exporters and ships can limit trade. We estimate the model and recover flexibly the matching process between ships and exporters. Endogenous trade costs provide a novel link to understand trade patterns and we showcase this by considering the impact of (i) an improvement in shipping efficiency; (ii) a slow-down in China; (iii) the opening of the Northwest Passage; (iv) search frictions.