DP18110 Frictions and adjustments in firm-to-firm trade
We study bilateral trade adjustments in a dynamic Ricardian model of trade with search frictions. The model generates an endogenous network of firm-to-firm trade relationships that displays price bargaining within and across firm-to-firm relationships. Following a foreign shock, firms sourcing inputs from abroad have three options: absorb the shock, renegotiate with their current supplier or switch to a supplier in another country. The relative importance of these adjustment margins depends on the interplay between Ricardian comparative advantages, search frictions and firms' individual characteristics, including the history of the relationship. We exploit French firm-to-firm trade data to estimate the model structurally and quantify the relative importance of these adjustment margins in 26 sectors and 14 EU countries.