Middlemen Margins and Globalization

Abstract

We study a competitive theory of middlemen with brand-name reputations necessary to overcome product quality moral hazard problems. Agents with heterogeneous abilities sort into different sectors and occupations. Middleman margins do not equalize across sectors if production of different goods are differentially prone to moral hazard, generating endogenous mobility barriers. We embed the model in a setting of North-South trade, and explore the distributive implications of trade liberalization. With large intersectoral moral hazard differences, results similar to those of Ricardo-Viner specific-factor models obtain, whereby southern inequality increases. Otherwise, opposite (i.e., Stolper-Samuelson) results obtain. (JEL D82, D63, F12, F13, L15)