Discussion Paper Details

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Title: Search Frictions in International Good Markets

Author(s): Clemence Lenoir, Julien Martin and Isabelle Mejean

Publication Date: January 2019

Keyword(s): firm-to-firm trade, Ricardian trade model, search frictions and structural estimation

Programme Area(s): International Trade and Regional Economics

Abstract: This paper studies how search frictions in international good markets can distort competition between firms of heterogeneous productivity. We add bilateral search frictions between buyers and sellers in a Ricardian model of trade. Search frictions prevent buyers from identifying the most productive sellers which induces competitive distortions and benefits low-productivity firms at the expense of high-productivity ones. We use French firm-to-firm trade data and a GMM estimator to recover search frictions faced by French exporters at the product and destination level. They are found more severe in large and distant countries and for products that are more differentiated. In a counterfactual exercise, we show that reducing the level of search frictions leads to an improvement in the efficiency of the selection process because the least productive exporters are pushed out of the market while the export probability and the conditional value of exports increase at the top of the productivity distribution. As a consequence, the mean productivity of exporters increases significantly.

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Bibliographic Reference

Lenoir, C, Martin, J and Mejean, I. 2019. 'Search Frictions in International Good Markets'. London, Centre for Economic Policy Research.