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Running head: SEARCH AND MATCHING APPROACH TO INTERNATIONAL TRADE 1

4

Wei Zhou

Econ 322

First Draft

A Search and Matching Approach to International Trade

Introduction

According to Reed and Trask (1-25), current international models refrain from including key features in the international exchange process occurring between and among countries. They claim that international trade occurs in frictionless continuum. In effect, it is difficult to account for the frictions that occur during the international exchange process and their effect on trade volume and pattern; information which could build on creating better international trade policies. In addition, there is not appreciation of appreciating decentralization of exchange and its effect on trade among countries.

In this light, this paper seeks to examine the Search-Matching approach to international trade, which accounts for key features including the effect of decentralization and friction on trade in revealing trade patterns and volumes. This provides insight on how the search-matching approach to international trade informs the development of better trade policy in addition to facilitating world welfare.

The Basic Ideas of the Search-Matching model

The search and matching model presents a statistical framework elaborating on how mutually beneficial relationships develop with time. The theory has had the most impact in labor economics particularly in helping examine creation of jobs. In search and matching model, search theory helps examine sellers and buyer unable to get trading partners, thus the need to look for them for the transaction to take place. With precision, search theory focuses on the optimum strategy of a business in selecting options that present as opportunities with random quality with the consideration that any delay in selecting an option may increase costs. In this case, the need to create a balance between cost of delay and worth that an option holds becomes critical, thus presenting search theory as optimal stopping problems. The search and matching model is formulated by including the matching theory through the study of general equilibrium whereby multiple searchers connect and interact (Grossman, Helpman and Kircher, 1-18).

An international search and matching model for the international model would be ideal if it recognizes key features in international trade, primarily decentralization and frictions. This comes from the recognition that relationships/interactions occurring during trade transactions are characterized by frictions that arise due to incompatibilities and disagreements that may occur, which have trade boosting or limiting effects. The model also recognizes that trade relationships or interactions do not just occur between two countries, but rather across and within economies, as well as, among multiple businesses, thus the need to recognize the decentralization of trade. In such trade, contacts and transactions occur through random matching of pairs. In the international trade model, in place of an auctioneer dictating prices, trade is bilateral meaning that it is driven by the bargaining process, giving each agent monopoly power to a certain extent, which cause friction, as they determine their terms of trade (Chade, Eeckhout and Smith 5-29.

Frictions and Decentralization in Searching- Matching Model and their Impact in International Trade

Search frictions often destabilize market equilibrium outcomes as explained through sequential and non sequential models, in which importance of option value when it comes to choices is undertaken. In simultaneous search, Stigler designs a model whereby consumers and in this case the countries purchasing goods and services in the international market sample distributors prices, as well as, decides on the searches to be made. Connote the search of the model. For instance, if an international business, for instance an importer is seeking a product under the premise it must be purchased on that day, the importer establishes contact with multiple exporters. The importer then searchers their stock and the exporters may deliver their price quotes to the importer. The importer if interested in buying goods with the lowest cost will opt for the lowest bidder. In this case, the importer may maximize on the marginal benefit derived from the sampling to reduce extensive search. Nonetheless, this gives rise to information friction and even price distortion because of relying on a limited sample or limited time frame. McCall 1965 sequential model, which is oriented towards wage search assumes that a worker could sample wages in the distribution chain periodically, deciding if to stop or continue search. In the international platform, the worker is replaces by businesses, which tend to first explore options presenting themselves with higher variances, lower wages, as well as, higher means as suggested by the model. The logic behind sequential search and matching approach is that is not grounded in the net gains expected but by net gain expected, which is then divided by success probability. This often encourages foreign exchangers and businesses in the international market to become more aggressive, thus pushing the exchangers to adapt a risk-taking behaviors. This has the downfall of making exchanges that do not fulfill the business needs, such as in the case of going for exchanges where price or quality is compromised (Yashiv, 1- 33).

Notably, there are numerous effects of international trade to the unemployment. This is because trade is believed to lead to the decrease of the relative demand for low-skilled labor as it has given a lot of its great effort to the highly skilled laborers. In developing a match, we let the agents bargain each on their prices depending on the produce that is brought. Agents who are highly productive will lead to the distortion of the market prices as they have an advantage over the other individuals who are low prodders in the market. In a situation where the agents are let to face same fictions in the market the output or the rate of the trade, exchange varies depending on each agent's productivity the agents in the market increase their exchange rates by increasing their trading partners depending on the on the proportion of the interested partners in the marketplace. A great assumption is made that the agents that are involved in the exchange in the markets and creating a stable price exit the markets after the trading process has taken place. In a highly populated market, an agent may take long in the matching compared to a trader who has less population who will go through the matching process in an easier way with a high probability of successful trades. In bargaining, a decentralized market favors the agents to meet with the needed trading partners (Zhang, 1-9).

In the quantities that the agents exchange, there also comes out the costs of the functions and the threats to the agents which in turn affects their output .When an agent threat increases, there is a matching increase to the to the terms of trades that are offered to him. The changes will also affect surplus received by the agents (Casella, 20-47).When the agents have equilibrium quantities; they ought to maximize their total surplus from the match. Changes in the factors that affect the agents will have negative effects to the equilibrium quantities expected as they are bound to change the bargaining power of the agents. In the welfare analysis of the agents, there are different types of group in charge of producing and in consuming. The numbers of job opportunities in this are determined by the free entry condition where the firms get involved in trading up to when they have the expected profits.

Agents that are involved in the centralized search of markets that is inside the country has a higher probability of getting a matching and also pull into the international exchange as one can build networks which in turn will go out of the borders to create ties with the foreign countries. Agents that have to look for the markets outside of the country may experience a delay in its search as the markets are not guaranteed with the sanctions and the frictions in place and this reduces the matching for international trade. For the level and the quantities of the two agents to match certain things have to be taken into consideration as aspects are foregone. The threat points will have to be identical and they ought to have the same costs of functioning this would translate to be either of the agents having the advantage in the bargaining process. The agent applies pure strategies to gain full entry into the foreign markets up until the expected utilities are the same as the ones in the home country (Zhang , 1-9).

Allowing of the involved countries to choose the degree of the market involvement and the quantities to be foregone in a matching will help accelerate the matching of a foreign market. This would turn to none of the factions affecting the markets in the economy. In this case, the open markets will lead to some participation and this would mean a positive push to the international trading and would help move the world closer to the global optimum. According to the Rauch approach their emphasis is on the importance of the fictions on the helping hand, they led in the entry to the foreign markets. The building of ethnic ties between the locals and the foreigners will also help in the gathering of information that may use to attack their markets and entry to the market would be created to match a way for the international trade with the other countries (Casella, 20-47).

Many difficulties experienced by the agents in the search for the markets are due to the policies in the foreign markets. In them, they may include the different non-tariff policies barriers, which may keep them off from fully accessing the market and making internal relations for an easier match in the markets. They also restrict any available that is there about trading which would enable them to get trading partners who are well versant with the markets.

An asymmetric equilibrium exists where the responsible country chooses to search in the foreign. A large group is considered to choose a search that is accommodating in the market while a small group would go for the non-search (Casella, 20-47). A better asymmetric equilibrium is more tractable in the market force. The welfare of the said agents improves as the economy improves too. Changes in the propositions of the agents, which are as a result of the increasing gains to the bargaining power that they have.

Impact of Findings/ Search-Matching Implications on Welfare and Trade Policy

Reed and Trask (516-543) note that the foreign search frictions have great effect on welfare, as well as, trade policies. Welfare highly differs based on foreign search frictions levels. Standard trade models would negatively affect competing sections and increase exporters’ welfare. Nonetheless, in the search and matching model, deviation takes place as the final effect on welfare may not be positive.

The model above illustrates what happens as in the sense that as agents move from one country to another decrease, little effect is recorded on relative bargaining strength or market compositions. Nonetheless, as search levels increase, number of agents in each country changes, thus enabling some to have bargaining strength. Consequently, the negative effects on welfare attributed to distortion of priced dominate any positive effects that the increase in efficient matches would have. This amounts to decline in welfare. In this case, increases in friction levels of the market search are attributed to decreased welfare in the international trade, which is even low than under autarky (Reed and Trask, 516-543).

However, as shown in figure above, often, this is not permanent because net outcome is reliant on relative magnitude seen in bargaining power effect, as we as, gains from foreign matches efficiency. In the case where variations in costs differ among agents in the autarky model agents moves increase particularly in presence of open market. This increase levels of price distortions due to relative bargaining power changes that have happened. In this case, foreign search frictions, when at low levels trigger welfare reductions characterized by huge differences in cost.

As Felbermayr (1-10) notes, one of the frictions resulting from the search and match model related to migration, which potentially lead to fiscal redistribution that affects natives better paying jobs and unemployment status. Recognizable, as international trade open up to the globalized world and businesses search for workers to meet their demands, immigration is inevitable. Nonetheless, research shows that immigration as part of solution to resolve workforce shortages needed to help companies/countries grow and venture internationally in exports and imports is a major challenge. The figure below shows a situation whereby the GDP of the country where immigrants originate continue to increase as immigrants send money made from other countries. In contrast, the host countries where the immigrants work nonetheless continue to experience problems, as more immigrants come in due to their demand and in search of jobs, and the already existing ones refuse to leave due to wage gap of the host versus their own country. In this case, they continue to live in the host country taking over jobs of the natives and gradually leading to decrease of wages/salaries due to the availability of immigrants who work for less and seem attractive for international companies who deal with large-scale production and need to lower costs. In this case, a country has not just to think of revising its immigration policy, but also its policies for wages and salaries to protect the natives.

Conclusion

In brief, a search and match model to international trade sheds insight on the key features often overlooked in international trade, primarily the frictions that occur, as well as, the decentralized nature of international trade. Recognizably, both affect trade in reference to affecting equilibrium balance in the market, encouraging risk taking behavior and causing price distortion among others negative effects. The negative effects on decreasing welfare are also evident, which are affected by how the agents move across countries. This also goes for effect on policy in reference to curtailing the immigration impact, thus the need for better policies to safeguard welfare and ensure immigration, as a consequence of international trade and associated negative effects are controlled.

Works Cited

Casella, A. Anonymous Market And Group Tie In The International Trade. Journal of International Economics 58 (2002): 19–47.

Chade, Hector, Jan Eeckhout, and Lones Smith. Search and Matching Models in Microeconomics , 2015. Web. 22nd May. 2016. < http://www.public.asu.edu/~hchade/papers/Survey.pdf>

Felbermayr, Gabriel . Immigration, Search Frictions and Redistribution: A Quantitative Welfare Analysis, 22d June, 2014. Web. 22nd May. 2016. < http://www.ferdi.fr/sites/www.ferdi.fr/files/battisti_etal_migwelfare.pdf>

Grossman, Gene M., Elhanan Helpman and Philipp Kircher. Matching, Sorting And The Distributional Effects Of International Trade, 2015. Web. 22nd May. 2016. <https://www.princeton.edu/~grossman/GHK_Sorting051415.pdfNiversity of Edinburgh.>

Reed , Robert R. and Kathleen A. Trask. “Decentralized international exchange”. The Canadian Journal of Economics, 39. 2. (2006): 516-543

Yashiv, Eran. Labor Search and Matching in Macroeconomics, April 2007. Wed. 22nd May, 2016. < http://ftp.iza.org/dp2743.pdf>

Zhang, Xin. An Economic Model of Search and Matching In International Trade, 2009. Wed. 22nd May, 2016. < https://ir.library.oregonstate.edu/xmlui/handle/1957/54685>