Essays in international trade and finance

This dissertation has four chapters. The first is a preview and summary of what follows in the next three. The other three chapters make up the three essays of this thesis, two inter-related essays in the area of international trade, and one in the area of international finance. The second chapter i.e., the first essay, studies the interaction between an importer and his unreliable suppliers. Given a random cost of breaking their contract to the importer, it is shown that the suppliers default on their contracts with some probability that is positively related to the cost of adding capacity and the degree of domestic market power possessed by the supplier in his market. Recognizing this, the importer procures a higher proportion of his demand from the supplier with lower domestic market power. This proposition is then tested in the third chapter by using a gravity model of bilateral trade with cross country data for 101 reporter countries and 71 partners. The results support the hypothesis. If one interprets the presence of domestic market power as the degree of protection of an economy, the model provides an independent channel, through the demand side, for the stylized fact that more protected economies are associated with worse export performance. The fourth chapter is an essay in international finance, specifically the bargaining involved in international sovereign debt negotiations. Since 1989, a number of sovereign debtors have negotiated settlements of their external debt held by commercial banks. This chapter examines whether the observed delay in reaching these settlements can be explained by economic models of negotiation under imperfect information. It considers two distinct scenarios, first, where the bank has no further interest in the country and second, where it has. It is shown that delay is indeed a prominent feature of equilibrium outcomes in both these models. Furthermore, risk-reducing enhancements, such as multilateral guarantees may actually exacerbate the delay in the second model. Thus, it may be better to support low income debtor countries rather than middle income debtors.