Relationship Specificity, Market Thickness, and International Trade

We develop a dynamic, search-theoretical, general-equilibrium model to investigate the effect of trade liberalization in vertically-related industries, emphasizing differential impacts depending on the degree of relationship specificity of components that are traded within the vertical relationships. The paper in particular unveils the role of search-and-matching and the resulting market structures of vertically-related industries in evaluating the impact of trade liberalization. We find that the higher the relationship specificity, the thinner is the components market; and that a reduction in trade costs, either in final-goods trade or in components trade, makes the components market thinner and enhances social welfare. We also examine how trade liberalization changes the trade volume of final goods and components, and whether they exhibit complementarity.