A directed search model of intermediated trade

This paper complements Antràs and Costinot's (2010) analysis of a two-good, two-country Ricardian economy in which farmers produce either goods but require intermediaries to exchange their production in the goods markets. The intermediation market is frictional, whereas the goods market is perfectly competitive. Unlike their random-search-and-price-bargaining setup, intermediaries herein post intermediation prices and farmers direct their search. Contrary to their findings, we show that opening the economy to international trade always leads to welfare gains. This is the case because domestic farmers benefit from relatively efficient intermediation technologies in terms of higher matching probabilities but also lower intermediation prices.

► Farmers require intermediaries to exchange their production in the goods markets. ► Intermediation market is frictional, and the goods market is perfectly competitive. ► Intermediaries post intermediation prices and farmers direct their search. ► Contrary to A&C(2010), no welfare losses follow from opening to international trade. ► Domestic farmers benefit from higher matching rates and lower intermediation prices.