Sector and Importer Determinants of Prices for Traded Intermediates

40 Pages Posted: 6 Nov 2019

See all articles by Eddy Bekkers

Eddy Bekkers

World Trade Organization (WTO)

Joseph F. Francois

University of Bern - Department of Economics; Centre for Economic Policy Research (CEPR); Vienna Institute of International Economic Studies (WIIW); University of Adelaide - School of Economics

Miriam Manchin

University College London; Centro Studi Luca d'Agliano

Date Written: October 2019

Abstract

While the literature on traded goods prices emphasizes final goods prices and related consumer theory to explain variation in goods prices with importer characteristics, trade in intermediates actually constitutes about two-thirds of total trade. We propose a mechanism for explaining variations in the prices of intermediates as a function of importer characteristics, wherein production is vulnerable to failure and the probability of failure declines in the quality of intermediates. Higher wages mean a greater opportunity cost of failure, leading to a stronger demand for high-quality intermediates where firms face higher wages. We find empirical support for this mechanism in the case of intermediate goods using IV regressions. In addition, our findings indicate that while the cost of labor explains about one-fifth of variation in imported intermediate prices, it is a non-significant determinant of imported final good prices.

Keywords: Intermediates Trade, Traded Goods Prices

JEL Classification: F12, F14

Suggested Citation

Bekkers, Eddy and Francois, Joseph F and Manchin, Miriam, Sector and Importer Determinants of Prices for Traded Intermediates (October 2019). CEPR Discussion Paper No. DP14080. Available at SSRN: https://ssrn.com/abstract=3478776

Eddy Bekkers (Contact Author)

World Trade Organization (WTO) ( email )

Rue de Lausanne 154
Geneva 21, CH-1211
Switzerland

Joseph F Francois

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Vienna Institute of International Economic Studies (WIIW) ( email )

Oppolzergasse 6
A-1010 Vienna
Austria

University of Adelaide - School of Economics ( email )

Adelaide SA, 5005
Australia
+61 8 8303 5540 (Phone)
+61 8 8223 1460 (Fax)

Miriam Manchin

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Centro Studi Luca d'Agliano ( email )

Via Conservatorio 7
Milan, 20122
Italy

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