The Value of Face-to-Face: Search and Contracting Frictions in Nigerian Trade
Distance between buyers and sellers can create search and contracting problems: how to find out what goods are available in far away places, and ensure they are actually delivered? Traveling to do business in person is one way of dealing with both, transforming a remote transaction into one that is face-to-face. I estimate the magnitude of search and contracting frictions in a developing country context by exploiting the fact that travel is a common, costly, and easily observable strategy for coping with them. I collect transaction-level panel data from Nigerian importers of consumer goods that combines the “what” of trade (e.g. products, quantities) with variables describing “how” trade is conducted (e.g. travel, payment terms). To account for patterns inconsistent with a full information environment, I build and estimate a model that embeds a search problem and a repeated game with moral hazard into a monopolistically competitive trade framework. Welfare from imported consumer goods would be 29% higher in the absence of both frictions. I decompose the total barrier into parts attributable to search and to contracting, and show why the effects will be larger in markets with low consumer spending, high firm entry/exit rates, and frequently changing products. The results suggest that greater attention to market integration policies beyond transportation and tariffs could have large welfare effects, particularly in developing countries. In counterfactual scenarios, I show that regulation of air travel between Nigeria and China would yield gains in Nigeria on the order of $650 million per year through consumer goods trade alone, while existing financial services do little to mitigate frictions because they do not offer a better contract enforcement technology than travel or repeated interaction.
Date: 25 October 2017, 12:30 (Wednesday, 3rd week, Michaelmas 2017)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Lecture Theatre
Speaker: Meredith Startz (Princeton University)
Organising department: Department of Economics
Organisers: Rossa O'Keeffe-O'Donovan (Nuffield College), Amma Serwaah-Panin (Nuffield College), Michael Koelle (Pembroke College)
Part of: CSAE Lunchtime Seminars
Booking required?: Not required
Audience: Public
Editors: Erin Saunders, Anne Pouliquen, Julia Coffey, Suzanne George