Inattentive Importers

Kunal Dasgupta and Jordi Mondria ()

Working Papers from University of Toronto, Department of Economics

Abstract: Importers rarely observe the price of every good in every market because of information frictions. In this paper, we seek to explain how the presence of such frictions shape the flow of goods between countries. To this end, we introduce rationally inattentive importers in a multi-country Ricardian trade model. Under specific assumptions about preferences and technology, we provide an information-theoretical foundation of the gravity equation that links bilateral trade flows with the cost of processing information faced by importers. A distinguishable feature of our model is that importers buy the same good from several countries. In a more general setting, we analyze how small reductions in observable trade costs may have large effects on trade flows as importers endogenously process different amounts of information across countries. We also show that, unlike traditional trade costs, information costs have non-monotonic implications for bilateral trade flows. Finally, we contribute to the rational inattention literature by providing a closed-form solution to a discrete choice problem with asymmetric prior beliefs.

Keywords: Gravity; Trade; Information; Magnification; Rational Inattention (search for similar items in EconPapers)
JEL-codes: D83 F10 F15 (search for similar items in EconPapers)
Pages: Unknown pages
Date: 2014-05-30
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Inattentive importers (2018)
Working Paper: Inattentive Importers (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:tor:tecipa:tecipa-512

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