DP1748 | Anonymous Market and Group Ties in International Trade

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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. Inspired by the role of coethnic ties and business groups in East Asia, we build a simple general equilibrium model of trade that formalizes this simple idea. Output is generated through bilateral matching of agents spanning a spectrum of types. Domestic matching is perfect ? every trader knows the type of all others and can approach any, but international matching is random ? every trader lacks the information to choose a partner?s type. Group ties, however, allow perfect matching abroad to a minority of individuals who have access to them and can decide whether or not to exploit them. We show that in the absence of ties the existence of informational barriers reduces the volume of trade. By increasing trade, group ties are beneficial to the economy as a whole, but have significant distributional effects. On average, group members benefit, but some may lose; non-members lose almost without exception, while the largest losses are concentrated among those with the poorest domestic market niches.