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

Tuesday, 13 December, 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? Travelling to do business in person is one way of dealing with both, transforming a remote transaction into one that is face-to-face. In this working paper Startz (2016) estimates 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. The author collects 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, the author builds and estimates 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. The author decomposes 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, the author shows that deregulation 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.