Search and Learning in Export Markets

The project investigates the process through which firms enter into and maintain relationships with buyers in foreign markets. It will provide microfoundations for understanding how macroeconomic shocks such as exchange rate changes, trade liberalizations, and financial crises affect trade patterns. It will also provide an empirical description of the formation of new cross-border business relationships, and of the ways in which exporters and importers adjust their behavior as their relationships mature and they learn about themselves and each other. The research will be based on newly-available data sets that describe all legal merchandise trade between Colombia and the United States. These data will be merged with establishment-level information on the exporters and importers who do business with one another. The resulting data set will allow project participants to model exporter-importer search and matching, the dynamics of post-match shipments, and the conditions under which buyer-seller matches break up.

In exploratory work with these shipments data, project investigators have documented some striking patterns. In a typical year, one-third to one-half of Colombian exporters are new, that is, they were not exporting to the U.S. in the previous year. The great majority of these new exporters ship tiny amounts, service a single buyer, and disappear from the U.S. market in the following year. But a small fraction survive and grow very rapidly, both in terms of sales per buyer and in terms of number of buyers. To explain these patterns the investigators have developed a dynamic search and learning model of exporter behavior. In this model, producers who hope to sell in a particular foreign market devote resources to identifying potential buyers there. When they find one, the value of the resulting sales conveys a noisy signal about the appeal of their products in this market. Taking stock of this new information, firms update their beliefs about the scope for export profits, and adjust the intensity of their search for more buyers accordingly. Thus, in addition to responding to exchange rate and cost shocks, firms' exports reflect their endogenous efforts to add new buyers to their client base.

Project investigators plan to extend their work in three ways. First they will generalize their proto- type model to (a) allow firms to learn from the experience of competing exporters, and from their own experiences in other (non-U.S.) markets, and (b) allow the history of each business relationship to affect its future evolution (duration and sales trajectory). Once these generalizations have been made, they plan to move toward formal econometric estimation of the model's parameters. Second, rather than viewing matches as purely random, they plan to treat them as reflecting assortative matching, and to characterize econometrically the 'mating' process, drawing on the marriage literature. Finally, to inform their modeling efforts, the investigators intend to conduct interviews with personnel at Colombian manufacturing firms with export experience, as well as with personnel at firms in the U.S. that are part of the potential client base.

Intellectual Merit. The research will provide a framework for assessing quantitatively how macroeconomic policies affect the export participation of individual producers over time, reconciling observations at the transactions level with aggregate data.

Broader Impact. The framework will address questions about how individual firms react to, and benefit from, the opportunity to trade. It will provide a set of tools to assess a wide set of policy questions concerning macroeconomics and trade policy, and innovation. The models developed may also shed light on the way that intra-national business relationships form and evolve.