Transitivity in International Trade: Evidence from Colombia-U.S. Firm Relationships

TL;DR

This paper investigates transitivity in firm trade networks, demonstrating its significance in network formation and shock propagation through analysis of Colombia-U.S. trade data.

Contribution

It introduces a novel method to detect and quantify transitivity in firm trade relationships, linking network structure to economic shocks.

Findings

Transitivity significantly influences firm network adjustments.

Shared trading partners increase likelihood of trade relationships.

Transitivity affects how shocks propagate through trade networks.

Abstract

A large literature has documented transitivity as a key feature of social networks: individuals are more likely connected with each other if they share common connections with other individuals. We take this idea to trading relationships between firms: firms are more likely to trade with each other if they share common trading partners. Transitivity leads to a clustered pattern of relationship formation and break-up. It is therefore important for understanding how firms meet and how shocks propagate through firm networks. We describe a method for detecting and quantifying transitivity in firm-to-firm transactions, based on systematic deviations from conditional independence across firm-to-firm relationships. We apply the method to Colombia-U.S. exporter-importer data and show in counterfactuals that transitivity is a significant and economically meaningful factor in how firm networks adjust to cost shocks.