Information Globalization, Risk Sharing, and International Trade

This paper studies the effect of reductions in information asymmetry - information globalization - on international risk sharing and trade flows. Information frictions are often invoked to explain low levels of international trade beyond those that measured trade frictions (tariffs, transportation costs, etc.) can explain. Using a relatively standard two-country general equilibrium model with asymmetric information about aggregate productivity, we find that more precise information about foreign productivity shocks reduces trade and international risk sharing. In other words, information frictions behave in the exact opposite manner as a standard trade cost.