DP16997 FIRM-TO-FIRM TRADE: IMPORTS, EXPORTS, AND THE LABOR MARKET
Customs data reveal heterogeneity and granularity of relationships among buyers and sellers. A
key insight is how more exports to a destination break down into more firms selling there and
more buyers per exporter. We develop a quantitative general equilibrium model of firm-to-firm
matching that builds on this insight to separate the roles of iceberg costs and matching frictions in
gravity. In the cross section, we find matching frictions as important as iceberg costs in impeding
trade, and more sensitive to distance. Because domestic and imported intermediates compete
directly with labor in performing production tasks, our model also fits the heterogeneity of labor
shares across French producers. Applying the framework to the 2004 expansion of the European
Union, reduced iceberg costs and reduced matching frictions contributed equally to the increase
in French exports to the new members. While workers benefitted overall, those competing most
directly with imports gained less, even losing in some countries entering the EU.
