NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Contracting and the Division of the Gains from Trade

Andrew B. Bernard, Swati Dhingra

NBER Working Paper No. 21691
Issued in October 2015
NBER Program(s):International Trade and Investment

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 duty-free access were more likely to increase their average price, decrease their quantity exported and reduce the number of import partners.

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Document Object Identifier (DOI): 10.3386/w21691

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