Affiliation:
1. University of Stavanger NO‐4036 Stavanger Norway
2. University of Florida Gainesville FL 32611‐0570 USA
3. BI Norwegian Business School NO‐5893 Bergen Norway
Abstract
AbstractResearch on trade relationships has documented a high rate of relationship breakup and churning. We use data on Norwegian exports to document two stylized facts about the stability of trade relationships. First, the probability of relationship breakup increases in the deviation of the relationship‐specific price from a reference price. Second, relationship hazards follow Zipf's law. We propose a search model with limited information and search frictions to explain these facts. Reference prices provide information on outside trade options that inform optimal breakups, leading to the first stylized fact. Strong heterogeneity in breakup frictions across relationships can explain the Zipf's law hazards.
Subject
Economics and Econometrics
Cited by
2 articles.
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