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International Trade with Inattentive Importers

Author

Listed:
  • Jordi Mondria

    (University of Toronto)

  • Kunal Dasgupta

    (University of Toronto)

Abstract

Importers rarely observe the price of every good in every market because of informational frictions. In this paper, we aim to explain how the presence of such frictions shapes the pattern of trade across countries. To this end, we introduce rationally inattentive importers in the Ricardian trade model of Eaton and Kortum (2002). Our preliminary results show that importers of a particular good focus on processing information about a few countries, mostly closer ones, and ignore far away producers of that good. We highlight a new “extensive†margin of trade adjustment - the number of countries an importer pays attention to. In this setting, a reduction in trade costs has large effects on trade flows as importers re-optimize information processing across countries. Even with unbounded support for productivity distributions, the model generates bilateral trade zeros in both directions. We go on to examine the implications of inattention for welfare.

Suggested Citation

  • Jordi Mondria & Kunal Dasgupta, 2013. "International Trade with Inattentive Importers," 2013 Meeting Papers 1074, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:1074
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    References listed on IDEAS

    as
    1. Treb Allen, 2014. "Information Frictions in Trade," Econometrica, Econometric Society, vol. 82, pages 2041-2083, November.
    2. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 441-487.
    3. Samuel S. Kortum & Jonathan Eaton & Costas Arkolakis, 2011. "Staggered Adjustment and Trade Dynamics," 2011 Meeting Papers 1322, Society for Economic Dynamics.
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