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Information Frictions, Internet and the Relationship between Distance and Trade

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Recent work suggests the patterns of international trade may be distorted because of information frictions. Little is known, however, about how advancements in information communication technology (ICT) affect trade patterns. The goal of our paper is to analyze how and why the adoption of such technology affects bilateral trade flows. Our context is the adoption of broadband internet in Norwegian firms over the period 2000-2008. We use panel data with information on Norwegian firms with regards to their production, technology, and trade. A public program with limited funding rolled out broadband access points, and provides plausibly exogenous variation in the availability and adoption of broadband internet in firms. We find that adoption of broadband internet makes trade patterns more sensitive to distance and economic size. Going from no broadband availability to full coverage increases the magnitude of the elasticity of trade with respect to distance by 0.12, and the elasticity of trade with respect to destination size by 0.06. For distance, this means that an increase in internet availability of 10 percentage points increases trade for a country at the 25th distance percentile by 1.1% more than for a country at the 75th distance percentile. The same difference for the GDP of a destination is 2.1%. We interpret the empirical results through a gravity theory of trade patterns, augmented with information frictions. We provide comparative statics predictions with respect to a reduction in information frictions, and show that these predictions are consistent with our empirical findings. Taken together, our results point to the importance of incorporating information frictions in the frequently used gravity equation, and they may help explain the so-called “distance puzzle” in international trade.

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  • Leuven, Edwin & Akerman, Anders & Mogstad, Magne, 2018. "Information Frictions, Internet and the Relationship between Distance and Trade," Memorandum 1/2018, Oslo University, Department of Economics, revised 17 Sep 2020.
  • Handle: RePEc:hhs:osloec:2018_001
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    Cited by:

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    2. Clément Magouyres & Thierry Mayer & Clément Mazet, 2019. "Technology-Induced Trade Shocks? Evidence from Broadband Expansion in France," Sciences Po Economics Discussion Papers 2019-10, Sciences Po Departement of Economics.
    3. Fernandes, Ana M. & Mattoo, Aaditya & Nguyen, Huy & Schiffbauer, Marc, 2019. "The internet and Chinese exports in the pre-ali baba era," Journal of Development Economics, Elsevier, vol. 138(C), pages 57-76.
    4. David Autor & David Dorn & Lawrence F Katz & Christina Patterson & John Van Reenen, 2020. "The Fall of the Labor Share and the Rise of Superstar Firms [“Automation and New Tasks: How Technology Displaces and Reinstates Labor”]," The Quarterly Journal of Economics, Oxford University Press, vol. 135(2), pages 645-709.
    5. Clemence Lenoir & Isabelle Mejean & Julien Martin, 2018. "Search Frictions in International Good Markets," 2018 Meeting Papers 878, Society for Economic Dynamics.
    6. Malgouyres, Clément & Mayer, Thierry & Mazet, Clément, 2019. "Technology-induced Trade Shocks? Evidence from Broadband Expansion in France," CEPR Discussion Papers 13847, C.E.P.R. Discussion Papers.
    7. Geoff Weir, 2018. "Wage Growth Puzzles and Technology," RBA Research Discussion Papers rdp2018-10, Reserve Bank of Australia.

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    More about this item

    Keywords

    Internet; Trade; Information Frictions; Gravity model; Distance;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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