Essays on Intermediation in International Economics

Abstract

This dissertation investigates the impacts of intermediation in international economics. It consists of three essays. In the first chapter, I study the dynamic characteristics of firms that gain access to foreign markets through trade intermediaries. In many countries, a sizable share of international trade is carried out by intermediaries. While large firms tend to export to foreign markets directly, smaller firms typically export via intermediaries (indirect exporting). I document a set of facts that characterize the dynamic nature of indirect exporting using firm-level data from Vietnam and develop a dynamic trade model with both direct and indirect exporting modes and customer accumulation. The model is calibrated to match the dynamic moments of the data. The calibration yields fixed costs of indirect exporting that are considerably lower than those of direct exporting, the variable costs of indirect exporting are higher, and the demand for the indirectly exported products grows more slowly. I demonstrate that a dynamic model that excludes the indirect exporting channel will overstate the welfare gains associated with trade liberalization by a factor of two. The difference is primarily due to the variable costs of exporting being underestimated in the model that excludes indirect exporting. Furthermore, I show that accounting for the dynamic characteristics of indirect exporting is crucial: a static model with indirect exporting will understate the gains from trade liberalization by almost half. In the second chapter, I investigate the effectiveness of the financial intermediation of sovereigns (as lenders) on the default incentives of other sovereigns (borrowers). Since the end of 2009, a number of euro area Member States have been unable to repay or refinance portions of their outstanding debt. In an effort to stymie the unfolding sovereign debt crisis, other euro area Member States, the European Central Bank, and the International Monetary Fund extended forms of financial assistance to countries experiencing or threatened by financing difficulties. Does access to financial assistance actually make financially distressed nations more or less likely to default on their debt? The availability of financial loans has an unclear effect on the default incentives of sovereigns. In order to formally evaluate the overall impact of financial assistance on a country's default incentives, I construct a two-period model of endogenous sovereign default with two sovereigns and a large number of international lenders. Both sovereigns borrow from international lenders. One sovereign provides financial loans to the other sovereign upon its request. During times of high debt levels and low output, these loans can actually help troubled sovereigns avoid default. However, in some instances, the presence of financial assistance may actually have a perverse effect and make it more likely that the sovereign will default on its debt to avoid lower consumption in the future. The model predicts that the total amount of outstanding debt and default incentives are mainly affected by $(i)$ the quality of punishment technologies available to lenders and $(ii)$ the behavior of lenders toward risk. If lenders have access to a better punishment technology, the borrower's incentive to default decreases dramatically while borrowing levels increase. However, if the punishment technology of lenders is not sufficiently strong enough, the effects of making financial assistance available on borrowing levels and its impact on default incentives is ambiguous. In the last chapter, Maliheh Birjandi-Feriz and I use Spanish firm-level data to study the static characteristics of manufacturing firms that sell the products of other manufacturing firms (commercialization). We find that 43 percent of Spanish manufacturing firms sell products that they did not directly produce. Among firms that commercialize, 75 percent commercialize other Spanish manufacturing firms' products and 54 percent commercialize foreign firms' products. Moreover, the total value of commercialization is around 11 percent of the total sales of manufacturing firms in the sample between 2000 to 2013. We document four key observations that describe the static characteristics of commercializing firms. These observations suggest that firms that commercialize foreign products tend to be larger and more productive than firms that do not commercialize or firms that commercialize only domestically produced goods. Moreover, importers with foreign commercialization tend to import from more distant destinations compared to importers without foreign commercialization. Given these observations, we propose a static general equilibrium model that can generate outcomes that are consistent with these empirical findings. There are three types of agents in the model economy: consumers, final good producers, and intermediate good producers. Final good producers choose where and how to buy the intermediate products to produce the final good. They can choose to buy from domestic intermediate producers or from other final good producers that are commercializing them. They face a similar decision when importing intermediate goods. The novelty of our model is in allowing the firms to be both producers and intermediaries (commercializing other firms products) at the same time.