NETWORKS VERSUS MARKETS IN INTERNATIONAL TRADE

NETWORKS VERSUS MARKETS IN INTERNATIONAL TRADE

June 1996 | James E. Rauch
This paper proposes a network/search view of international trade in differentiated products, arguing that proximity and common language/colonial ties are more important for these products than for homogeneous products traded on organized exchanges. The author uses a gravity model of international trade to examine the importance of these factors and finds that proximity and common language/colonial ties are indeed more significant for differentiated products. The paper also discusses the implications of these findings for the extent to which differentiated and homogeneous products are traded, suggesting that reference prices can reduce barriers to trade. However, the evidence presented only weakly supports the hypotheses, with small but consistent differences in coefficients across commodity groups. The paper concludes by discussing alternative explanations for the findings and suggests that further research is needed to fully understand the role of networks and search in international trade.This paper proposes a network/search view of international trade in differentiated products, arguing that proximity and common language/colonial ties are more important for these products than for homogeneous products traded on organized exchanges. The author uses a gravity model of international trade to examine the importance of these factors and finds that proximity and common language/colonial ties are indeed more significant for differentiated products. The paper also discusses the implications of these findings for the extent to which differentiated and homogeneous products are traded, suggesting that reference prices can reduce barriers to trade. However, the evidence presented only weakly supports the hypotheses, with small but consistent differences in coefficients across commodity groups. The paper concludes by discussing alternative explanations for the findings and suggests that further research is needed to fully understand the role of networks and search in international trade.
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