Search Externalities in Firm-to-Firm Trade

IMF Working Papers, March 19, 2021

Source details

Model of firm-to-firm search and matching showing that the impact of falling trade costs on firm sourcing decisions and consumer welfare depends on the relative size of search externalities in domestic and international markets.
Search externalities can be:
- Positive if firms share information about potential matches.
- Negative if the market is congested.
Using unique firm-to-firm transaction-level data from Uganda, empirical evidence is consistent with positive externalities in international markets and negative externalities in domestic markets.
A dynamic quantitative version of the model calibrated for Uganda shows that a 25% reduction in trade costs led to a 3.7% increase in consumer welfare, 12% of which was due to search externalities.

Data: unique firm-to-firm transaction-level data from Uganda.
Main empirical patterns documented:
- Positive externalities in international markets.
- Negative externalities in domestic markets.

Model: dynamic quantitative firm-to-firm search-and-matching framework.
Counterfactual exercise for Uganda:
- Trade cost shock: 25% reduction in trade costs.
- Resulting consumer welfare change: 3.7% increase.
- Share of welfare gain due to search externalities: 12%.

Subject: Econometric analysis, Imports, International trade, Labor, Labor market frictions, Search models, Taxes, Value-added tax
Keywords: buyer-supplier search, consumer welfare, East Africa, Firm-to-Firm Trade, Global, Importing, Imports, Labor market frictions, search externality, Search models, Search-and-Matching, transport cost reduction, Value-added tax, VAT Data, welfare gains from trade