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Information Globalization

Author

Listed:
  • Isaac Baley
  • Laura Veldkamp
  • Michael Waugh

Abstract

How do information frictions affect international prices and trade? In a standard, two-country Armingtonmodel of trade, information frictions impede the coordination of exporting behavior across countries. Because the terms of trade depend on relative exports, less coordination leads to more volatile terms of trade. Volatility in the terms of trade has the potential to reduce the level of trade by making trade more risky, but it also has the potential to increase the level of trade by increasing the expected terms of trade. We derive general conditions on preferences as to which of these forces—the increase in risk or increase in return—dominate. With CES preferences, as long as goods are not too substitutable, information frictions impede trade. With empirically plausible elasticities of substitution, information frictions facilitate trade.

Suggested Citation

  • Isaac Baley & Laura Veldkamp & Michael Waugh, 2016. "Information Globalization," Working Papers 917, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:917
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    File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/917.pdf
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    References listed on IDEAS

    as
    1. Dimitra Petropoulou, 2007. "Information Costs, Networks and Intermediation in International Trade," Economics Series Working Papers 370, University of Oxford, Department of Economics.
    2. Treb Allen, 2014. "Information Frictions in Trade," Econometrica, Econometric Society, vol. 82, pages 2041-2083, November.
    3. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
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    Cited by:

    1. Ana Figueiredo, 2017. "Uncertainty in education: The role of communities and social learning," 2017 Meeting Papers 529, Society for Economic Dynamics.

    More about this item

    Keywords

    information asymmetry; globalization; risk sharing; international trade;

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F6 - International Economics - - Economic Impacts of Globalization

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