Geography, Search Frictions and Trade Costs

Abstract: International trade crucially relies on the efficient functioning of the global shipping industry. Trade costs (i.e. freight rates), cargo delivery times and even trade patterns themselves are determined by the spatial equilibrium of cargo and ships. In this paper, we ask how world natural and economic geography (i.e. country locations, natural inheritance, demand for goods) shape up trade costs and flows. We establish that trade costs depend on the entire trade linkages across countries, not just the bilateral distance between trading partners. As such they provide a novel link to understand trade patterns. In addition, we investigate whether the matching process between ships and cargos is efficient, or whether it is subject to search frictions, potentially leading to a substantial loss due to unrealized trade. We identify and measure these frictions and quantify their impact on global trade.

We build and estimate a dynamic spatial search model for bulk shipping. Our setup captures the salient features of the industry. Geography enters the model through different trip durations across different ports. In addition to natural geography, locations differ in their economic geography, namely the inflow of new freights with heterogeneous values and destinations demanding transportation; as well as the freights from other regions that seek to be transported there. Search frictions may prevent matching of all available freights and ships. Ships are homogeneous and forward looking: when negotiating a trip they also take into account matching opportunities in the destination.

We collect a unique dataset that combines four large databases and allows us to study international trade through the lens of the shipping industry. In particular, we collect (i) a dataset of shipping spot contracts involving the signing parties, dates, trip origin/destination and price; (ii) satellite data reporting ships' positions, speed, and level of draft, at regular intervals of at most 6 minutes; (iii) an exhaustive dataset on world ports; (iv) weather conditions (wind speed and wave height) in world oceans.

(Joint with Giulia Brancaccio and Theodore Papageorgiou)

Schedule

Empirical Microeconomics Workshop attendees should take note that this seminar is cross-listed with the Industrial Organization Workshop and takes place on Tuesday in McNeil 103. 

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