Back to the calendar
UCLouvain Economics Seminar - Dennis Novy, Warwick University
By UCLouvain Economics Seminar

Dennis Novy

Warwick University

will give a presnetation on

Transitivity in Trade


A large literature on social networks shows that individuals are more likely connected with each other if they have common connections with other individuals. We take this idea to trade between firms. Firms are more likely to trade with each other if they share common trading partners, and forming a new connection makes trade with other partners more likely. We embed such transitivity effects in a model of trade in differentiated products. Transitivity effects act as an externality leading to lower effective trade costs, especially over short distances where trade connections tend to be dense. This implies an agglomeration-like impact at the local level. We show that transitivity effects between firms translate to the aggregate level of trade between locations. In general equilibrium, the model yields a gravity framework with endogenous bilateral trade costs that depend on the intensity of shared trade links with third locations. On the empirical side, we use data on domestic US manufacturing shipments to estimate transitivity effects. Our results suggest that they can account for a sizeable fraction of the variation in trade flows.

Joint with Alejandra Martinez, Carlo Perroni