Information Costs and Networks in International Trade

This paper discusses the impact of information costs on the organisation of international trade. The conditions under which trade is organized through an information intermediary, the incentives for network building and the implications for trade volumes are analysed using a stylised model. The model illustrates how information barriers can affect the way trade is organised. The model shows how direct trade through search and indirect trade through an information intermediary can coexist in equilibrium. The framework is employed to discuss the effects of information and communication technology improvements on the organization of international trade. Results suggest that for a range of parameter values improvements in information technology, such as access to the Internet, can strengthen the incentives for network building by information intermediaries, increasing trade volumes traded indirectly through the network and raising world welfare. Moreover, direct ties between certain traders are introduced to reflect the operation of an ethnic network of traders, which can be shown to crowd out intermediation.