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Sector and importer determinants of prices for traded intermediates

Bekkers, E; Francois, J; Manchin, M; (2020) Sector and importer determinants of prices for traded intermediates. Canadian Journal of Economics , 53 (2) pp. 720-742. 10.1111/caje.12441. Green open access

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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 labour explains about one fifth of variation in imported intermediate prices, it is a non‐significant determinant of imported final goods prices.

Type: Article
Title: Sector and importer determinants of prices for traded intermediates
Open access status: An open access version is available from UCL Discovery
DOI: 10.1111/caje.12441
Publisher version: https://doi.org/10.1111/caje.12441
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > SSEES
URI: https://discovery.ucl.ac.uk/id/eprint/10102721
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