Information globalization
Isaac Baley,
Laura Veldkamp and
Michael Waugh
Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra
Abstract:
Common wisdom dictates that uncertainty impedes trade—we show that uncertainty can fuel more trade in a simple general equilibrium trade model with information frictions. In equilibrium, increases in uncertainty increase both the mean and the variance in returns to exporting implying that trade can increase or decrease with uncertainty depending on preferences. Under general conditions on preferences, we characterize the importance of these forces using a sufficient statistics approach. Higher uncertainty leads to increases in trade because agents receive improved terms of trade, particularly in states of nature where consumption is most valuable. Trade creates value, in part, by offering a mechanism to share risk and risk sharing is most effective when both parties are uninformed.
Keywords: information asymmetry; globalization; risk sharing; international trade (search for similar items in EconPapers)
JEL-codes: D5 D8 D9 F4 F6 (search for similar items in EconPapers)
Date: 2016-03, Revised 2019-02
New Economics Papers: this item is included in nep-cse
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Citations: View citations in EconPapers (1)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1529
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