The Value of Face-to-Face: Search and Contracting Problems in Nigerian Trade

53 Pages Posted: 8 Jan 2018

See all articles by Meredith Startz

Meredith Startz

Princeton University - International Economics Section; Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 27, 2016

Abstract

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.

Suggested Citation

Startz, Meredith and Startz, Meredith, The Value of Face-to-Face: Search and Contracting Problems in Nigerian Trade (November 27, 2016). Available at SSRN: https://ssrn.com/abstract=3096685 or http://dx.doi.org/10.2139/ssrn.3096685

Meredith Startz (Contact Author)

Princeton University - International Economics Section ( email )

Princeton, NJ 08544-1021
United States

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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