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International Trade with Inattentive Importers

  • Jordi Mondria

    (University of Toronto)

  • Kunal Dasgupta

    (University of Toronto)

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.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1074.

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Date of creation: 2013
Date of revision:
Handle: RePEc:red:sed013:1074
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  2. Treb Allen, 2012. "Information Frictions in Trade," 2012 Meeting Papers 125, Society for Economic Dynamics.
  3. Rubinstein, Yona & Helpman, Elhanan & Melitz, Marc, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," Scholarly Articles 3228230, Harvard University Department of Economics.
  4. Samuel S. Kortum & Jonathan Eaton & Costas Arkolakis, 2011. "Staggered Adjustment and Trade Dynamics," 2011 Meeting Papers 1322, Society for Economic Dynamics.
  5. Filip Matêjka & Alisdair McKay, 2015. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," American Economic Review, American Economic Association, vol. 105(1), pages 272-98, January.
  6. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
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