Information asymmetries and contracting barriers play pivotal roles in shaping international trade. Such frictions may cause small firms in low-income countries to either avoid importing altogether or to use expensive ways to overcome these obstacles, both of which constrain growth by barring firms from trading with higher quality suppliers. The proposed research looks to answer two related questions: 1) how large are different information and contracting frictions and how extensively and intensively do they impede relationship formation along the international supply chain?; and 2) to what extent can social media platforms be used to reduce these frictions? To address these questions, the researchers will conduct an RCT that connects Senegalese wholesalers to intermediaries in Turkey who interact with export manufacturers.
The methodology will decompose the frictions into three different categories which will serve as the RCT’s treatment arms: search costs, contracting: reputation building, and contracting: moral hazard. The studied sample will comprise 1500-2000 Senegalese wholesalers and medium-sized retailers in Dakar markets (“buyers”), and Senegalese intermediaries that live in Turkey or visit regularly (“suppliers”). The first treatment arm will randomise access to three supplier WhatsApp groups. These are private groups run by suppliers who advertise products and prices using high quality pictures and videos. This reduces two types of search frictions: the cost of finding a new foreign supplier, and the cost of seeing varieties and quality offered. The second treatment arm will test whether buyers trade more and learn faster by sharing information about suppliers. It will randomise some buyers into small buyer discussion groups. The third treatment arm will test whether buyers use joint punishment strategies to incentivize the supplier more strongly by informing a randomly selected share of the connected buyers about the motivation of the supplier. The data from this RCT will contain detailed information on the price, quantity, and contract structure for input purchases among a large sample of informal firms, which is rarely observed in standard datasets.
The potential policy implications are twofold. Firstly, the research will quantify trade frictions among small merchants and measure how digital tools can alleviate them. If one specific friction is found to be dominant, this may influence the direction of policymaking in sub-Saharan Africa. Secondly, understanding the consequences of digital transformation is crucial for policymakers to shape an environment that encourages the adoption of digital technologies. Hence, the results from using social media platforms could play a crucial role in growing the sub-Saharan digital economy.
