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Contracting and the division of the gains from trade

Bernard, Andrew B. and Dhingra, Swati (2015) Contracting and the division of the gains from trade. CEP Discussion Paper (1381). Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

This paper examines the microstructure of import markets and the division of the gains from trade among consumers, importers and exporters. When exporters and importers transact through anonymous markets, double marginalization and business stealing among competing importers lead to lower profits. Trading parties can overcome these inefficiencies by investing in richer contractual arrangements such as bilateral contracts that eliminate double marginalization and joint contracts that also internalize business stealing. Introducing these contractual choices into a trade model with heterogeneous exporters and importers, we show that trade liberalization increases the incentive to engage in joint contracts, thus raising the profits of exporters and importers at the expense of consumer welfare. We examine the implications of the model for prices, quantities and exporter-importer matches in Colombian import markets before and after the US-Colombia free trade agreement. US exporters that started to enjoy dutyfree access were more likely to increase their average price, decrease their quantity exported and reduce the number of import partners.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2015 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
JEL classification: F - International Economics > F1 - Trade > F10 - General
F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies
F - International Economics > F1 - Trade > F14 - Country and Industry Studies of Trade
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 14 Jan 2016 15:22
Last Modified: 07 Apr 2019 23:03
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/64995

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