DP15609 Relationship stickiness, international trade, and economic uncertainty

Author(s): Julien Martin, Isabelle Mejean, Mathieu Parenti
Publication Date: December 2020
Keyword(s): firm-to-firm trade, relationship specificity, uncertainty
JEL(s): D22, F14, F44
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15609

This paper examines how the degree of stickiness in business relationships influences the real impact of aggregate uncertainty. We first develop a novel index of relationship stickiness (RS) for more than 5,000 HS6 products based on the duration of firm-to-firm trade. The RS measure is derived from a stylized search model in which a higher degree of stickiness implies a lower probability of switching and longer firm-to-firm trade relationships, conditional on match quality. Relationship stickiness shapes the dynamics of firm-to-firm relationships in response to uncertainty shocks. Uncertainty shocks induce a significant and larger decrease in the rate at which new firm-to-firm relationships are formed in high-RS product categories. The relationship between uncertainty and separation rates also varies along the distribution of RS indices, the probability of a trade relationship ending being significantly reduced in sticky-product markets in uncertain times. These results provide evidence that trade of sticky products is characterized by wait-and-see behaviors during uncertainty episodes.