Emergence of Networks in Distance-Constrained Trade

Abstract

Long-distance trade has been rapidly increasing in recent years. As traders from around the world exchange goods, they form networks with traders as nodes and transactions as links. We use an agent-based model of a simple artificial economy to examine the emergence of trade networks when the distance between traders matters. Distance can become an issue if fuel for transportation becomes expensive or if greenhouse gas emissions from transportation become a major concern. We model the distance constraint as a transaction cost proportional to the amount of goods traded and the distance that those goods must be transported. We find that the resulting network topology is a good indicator of the stability and resilience of the economic system. The topology is random when there is no distance constraint. As the transaction cost increases, the topology transitions into a stable scale-free structure with some clustering, and a large fraction of trade occurs within local regions around the network hubs. Under these conditions, the final welfare of the traders decreases only modestly and environmental efficiency increases significantly when each region has a diverse combination of tradable goods.

Keywords

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