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Information Frictions in Trade

Treb Allen

No 125, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: It is costly to acquire information about markets in other places, especially in developing countries. In this paper, I examine the effect of such information frictions on trade. I embed a process where heterogeneous producers sequentially search across regions to determine where to sell their produce into a perfect competition Ricardian trade model. Information frictions explain the empirical failure of price arbitrage and provide new insight into how market conditions affect trade flows. Using a data set I assemble on regional agricultural trade in the Philippines, I show that observed trade flows and prices suggest the presence of substantial information frictions. I then structurally estimate the model to disentangle information frictions from transportation costs. I find that (1) estimated transportation costs are half as large as those implied by complete information models and more consistent with observed freight costs; and (2) the vast majority (93 percent) of the “gravity†relationship between trade flows and distance can be attributed to information frictions rather than transportation costs.

New Economics Papers: this item is included in nep-int
Date: 2012
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Journal Article: Information Frictions in Trade (2014) Downloads
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