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Overcoming Informational Barriers to International Resource Allocation: Prices and Ties

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Author Info
James E. Rauch
Alessandra Casella

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Abstract

Incomplete information in the international market creates difficulty in matching agents with productive opportunities and interferes with the ability of prices to allocate scarce resources across countries. Ties through international information-sharing networks or parent-subsidiary relationships overcome this matching friciton. When the difference between country factor-endowment ratios is small relative to the share of agents that is tied, efficient arbitrage and the standard properties of neoclassical trade models prevail. When the difference between factor-endowment ratios is sufficiently large, this equilibrium breaks down and countries become partially insulated from each other in the sense that the price (wage) of each country's immobile resource is more sensitive to changes in domestic than foreign supply and trade liberalization causes less convergence in relative resource prices. The model is applied to the debate over the impact of international trade on domestic wages, and extended to address whether ties can reduce world welfare through trade diversion and to compare the effect of ties on trade in differentiated versus homogenous products.

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number 2001-18.

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Date of creation: Nov 2001
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Handle: RePEc:cdl:ucsdec:2001-18

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. James E. Rauch & Vitor Trindade, 2000. "Information and Globalization: Wage Co-Movements, Labor Demand Elasticity, and Conventional Trade Liberalization," NBER Working Papers 7671, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December. [Downloadable!] (restricted)
  5. Granovetter, Mark, 1995. "Coase Revisited: Business Groups in the Modern Economy," Industrial and Corporate Change, Oxford University Press, vol. 4(1), pages 93-130.
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  8. Casella, Alessandra & Rauch, James E, 1998. "Overcoming Informational Barriers to International Resource Allocation: Prices and Group Ties," CEPR Discussion Papers 1978, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Martin Feldstein & Charles Horioka, 1980. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. J Rauch & Alessandra Casella, 2001. "Overcoming Informational Barriers to International Resource Allocation: Prices and Ties," University of California at San Diego, Economics Working Paper Series 2001-18, Department of Economics, UC San Diego. [Downloadable!]
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  11. Bernard, Andrew B. & Bradford Jensen, J., 1999. "Exceptional exporter performance: cause, effect, or both?," Journal of International Economics, Elsevier, vol. 47(1), pages 1-25, February. [Downloadable!] (restricted)
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  12. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December. [Downloadable!] (restricted)
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  13. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September. [Downloadable!] (restricted)
  14. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-64, September. [Downloadable!] (restricted)
  15. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June. [Downloadable!] (restricted)
  16. James E. Rauch & Vitor Trindade, 2002. "Ethnic Chinese Networks In International Trade," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 116-130, February. [Downloadable!] (restricted)
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  17. Gereffi, Gary, 1999. "International trade and industrial upgrading in the apparel commodity chain," Journal of International Economics, Elsevier, vol. 48(1), pages 37-70, June. [Downloadable!] (restricted)
  18. Jeffrey D. Sachs & Howard J. Shatz, 1994. "Trade and Jobs in Manufacturing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1994-1), pages 1-84. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Docquier, Frederic & Rapoport, Hillel, 2004. "Skilled migration: the perspective of developing countries," Policy Research Working Paper Series 3382, The World Bank. [Downloadable!]
    Other versions:
  2. Kumagai, Satoru, 2007. "Comparing the Networks of Ethnic Japanese and Ethnic Chinese in International Trade," IDE Discussion Papers 113, Institute of Developing Economies, Japan External Trade Organization(JETRO). [Downloadable!]
  3. Aditya Bhattacharjea, 2004. "IMPERIAL LEGACY The Persistence of Colonial Trade Patterns," Working papers 126, Centre for Development Economics, Delhi School of Economics. [Downloadable!]
  4. James E. Rauch & Alessandra Casella, 2003. "Overcoming Informational Barriers to International Resource Allocation: Prices and Ties," Economic Journal, Royal Economic Society, vol. 113(484), pages 21-42, January. [Downloadable!] (restricted)
    Other versions:
  5. Robert C. Feenstra & Gordon H. Hanson & Songhua Lin, 2002. "The Value of Information in International Trade: Gains to Outsourcing through Hong Kong," NBER Working Papers 9328, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Alberto Alesina & Eliana La Ferrara, 2004. "Ethnic Diversity and Economic Performance," NBER Working Papers 10313, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. T. Huw Edwards, 2006. "Search and the Path-Dependency of Trade," Discussion Paper Series 2006_12, Department of Economics, Loughborough University, revised May 2006. [Downloadable!]
  8. Maurice Kugler & Hillel Rapoport, 2005. "Skilled Emigration, Business Networks and Foreign Direct Investment," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  9. Michel, BEINE & Cecily, DEFOORT & Frédéric, DOCQUIER, 2007. "A Panel Data Analysis of the Brain Gain," Université catholique de Louvain, Département des Sciences Economiques Working Paper 2007024, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
  10. Tibor Besedes & Thomas J. Prusa, 2004. "Surviving the U.S. Import Market: The Role of Product Differentiation," NBER Working Papers 10319, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. James E. Anderson, 1999. "Why Do Nations Trade (So Little)?," Boston College Working Papers in Economics 428, Boston College Department of Economics. [Downloadable!]
  12. Frédéric Docquier, 2006. "Brain Drain and Inequality Across Nations," IZA Discussion Papers 2440, Institute for the Study of Labor (IZA). [Downloadable!]
  13. Nicola Genovese & Maria Grazia La Spada, 2006. "Diversity and Pluralism: An Economist's View," Working Papers 2006.62, Fondazione Eni Enrico Mattei. [Downloadable!]
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