Frictions and adjustments in firm-to-firm trade

We study bilateral trade adjustments in a dynamic Ricardian model of trade with search frictions. The model generates an endogenous network of firm-to-firm trade re- lationships that displays price bargaining within and across firm-to-firm relationships. Following a foreign shock, firms sourcing inputs from the country have three options: Ab- sorb the shock, renegotiate with their current supplier or switch to a supplier in another country. The relative importance of these adjustment margins depends on the interplay between the Ricardian comparative advantages, search frictions and firms’ individual char- acteristics, including the history of the relationship. We exploit French firm-to-firm trade data to estimate the model structurally and quantify the relative importance of these adjustment margins in 26 sectors and 14 EU countries.