Graduate Thesis Or Dissertation
 

An economic model of search and matching in international trade

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https://ir.library.oregonstate.edu/concern/graduate_thesis_or_dissertations/m613n0900

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  • Small manufacturing firms often serve a domestic market but would like to expand their sales overseas. It is difficult for a small firm to develop overseas contracts and relationships, however, in part because of their small size, and because the advantages of their products may not always be obvious. The result is that export participation rates (the share of firms that export out of all firms in a national economy or subsector) are typically low. Trade economists have developed models to explain this. Most of these models have heterogeneous firms in which high-productivity firms are able to export, while lower productivity firms exist only to serve a domestic market. This thesis takes a different approach that focuses on the demand side of the issue, specifically, on search and matching costs, in order to explain low export participation rates and how they are affected by different factors. The approach borrows from economic models of the labor market, in which employers and employees find each other through a process of search and matching. The potential and challenges of search and matching in the export market are examined in this research by modeling small domestic firms seeking an importer in a foreign country to sell a highly differentiated product to variety-loving consumers. In this model, search occurs in both directions and is an uncoordinated and costly activity. Contracts between domestic producers and foreign importers are determined by a matching function, which is a functional form that allows for randomness in the process of search and matching. Once the model is developed, equilibrium relationships between prices, markups, export participation, and export quantities are derived such that all of the model’s variables are in a consistent equilibrium. After this equilibrium is derived, the model is shown to be able to replicate certain stylized facts about the evolution of export participation rates among firms as implied by recent United States Census Bureau export data. After the model is verified in this way, implications of the model are determined through a series of comparative static analysis. In particular, the implications of changes in producers search costs, importers search costs, taxes and subsidies are examined. Some of the results are as follows. The export participation rate rises with falling importer search costs but falls if too many producers enter the market when producer search costs fall. Trade liberalization can reduce export participation rate while increasing export volumes. Other results are established and implications for policymakers are made.
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