James E. Rauch and Joel Watson
Motivated by evidence on the importance of incomplete information and networks in international trade, we investigate the supply of network intermediation. We build a general-equilibrium model in which agents with networks of foreign contacts either can use their networks themselves in support of production or can make their networks available for others to use and thereby can become network intermediaries. We use this model for comparative statics and welfare analysis. One welfare conclusion is that intermediaries may have inadequate incentives to maintain or to expand their networks, suggesting a rationale for the policies followed by some countries to encourage large-scale trading companies.