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Information Frictions in Trade

  • Treb Allen

    (Yale University)

It is costly to acquire information about markets in other places, especially in developing countries. In this paper, I examine the effect of such information frictions on trade. I embed a process where heterogeneous producers sequentially search across regions to determine where to sell their produce into a perfect competition Ricardian trade model. Information frictions explain the empirical failure of price arbitrage and provide new insight into how market conditions affect trade flows. Using a data set I assemble on regional agricultural trade in the Philippines, I show that observed trade flows and prices suggest the presence of substantial information frictions. I then structurally estimate the model to disentangle information frictions from transportation costs. I find that (1) estimated transportation costs are half as large as those implied by complete information models and more consistent with observed freight costs; and (2) the vast majority (93 percent) of the “gravity†relationship between trade flows and distance can be attributed to information frictions rather than transportation costs.

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File URL: https://economicdynamics.org/meetpapers/2012/paper_125.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 125.

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Date of creation: 2012
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Handle: RePEc:red:sed012:125
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  2. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September.
  3. James A. Brander & Paul Krugman, 1983. "A 'Reciprocal Dumping' Model of International Trade," NBER Working Papers 1194, National Bureau of Economic Research, Inc.
  4. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  5. Russell Hillberry & David Hummels, 2005. "Trade Responses to Geographic Frictions: A Decomposition Using Micro-Data," NBER Working Papers 11339, National Bureau of Economic Research, Inc.
  6. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, December.
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