Kiel Working Papers, Kiel Institute for World Economics
No 1839:
A Bargaining Theory of Trade Invoicing and Pricing
Linda Goldberg and Cédric Tille
Abstract: We develop a theoretical model of international trade
pricing in which individual exporters and importers bargain over the
transaction price and exposure to exchange rate fluctuations. We find that
the choice of price and invoicing currency reflects the full market
structure, including the extent of fragmentation and the degree of
heterogeneity across importers and across exporters. Our study shows that a
party has a higher effective bargaining weight when it is large or more
risk tolerant. A higher effective bargaining weight of importers relative
to exporters in turn translates into lower import prices and greater
exchange rate pass-through into import prices. We show the range of price
and invoicing outcomes that arise under alternative market structures. Such
structures matter not only for the outcome of specific exporter-importer
transactions, but also for aggregate variables such as the average price,
the average choice of invoicing currency, and the correlation between
invoicing currency and the size of trade transactions
Keywords: currency, invoicing, Exchange rate; (follow links to similar papers)
JEL-Codes: F30,; F40; (follow links to similar papers)
55 pages, April 2013
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