International Trade with Inattentive Importers
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 â€œextensiveâ€ 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.
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