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Anonymous Market and Group Ties in International Trade

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Working paper
Author/s: 
Alessandra Casella and James E. Rauch
Issue number: 
1998.036
Publisher: 
FEEM
Year: 
1998
When trade involves differentiated products, preferential ties to a group settled abroad facilitate an exporter's entry into the foreign market by providing information and access to distribution channels. This contrasts with the difficulties experienced by an unattached producer unfamiliar with the foreign environment. We build a simple general equilibrium model of trade that formalises this observation. Output is generated through bilateral matching of agents spanning a spectrum of types. In the domestic market every trader knows the type of all others and can approach whomever he chooses; when matching abroad, instead, traders lack the information necessary to choose their partner's type. A minority of individuals has access to group ties that extend complete information to international matches. The existence of informational barriers reduces the volume of trade, and thus by increasing total trade group ties are beneficial to the economy as a whole. However, the ties have significant distributional effects because they modify the composition of the market. Only the more desirable types choose to match through the group, worsening the prospects of successful international partnerships for everybody else. The volume of trade and expected per capita income rise for group members, but fall for non-members. Whether or not they have access to the ties, individuals with the weakest domestic alternatives are always hurt.
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