INTERNATIONAL TRADE

This paper presents a pairwise matching model with two-sided infor-mation asymmetry to analyse the impact of information costs on endoge-nous network building and matching by information intermediaries. The framework innovates by examining the role of information costs on incen-tives for trade intermediation, thereby endogenising the pattern of direct and indirect trade. Intermediation is shown to unambiguously raise ex-pected trade volume and social welfare by expanding the set of matching technologies available to traders. Moreover, convexity in network-building costs is necessary for both direct and indirect trade to arise in equilibrium while the pattern of trade is shown to depend on the level of information costs as well as the relative effectiveness of direct and indirect matching technologies with changing information costs. The model sheds light on the relationship between information frictions and aggregate trade vol-ume, which may be non-monotonic as a result of conflicting effects of information costs on the incentives for direct and indirect trade