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Inattentive Importers

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  • Kunal Dasgupta
  • Jordi Mondria

Abstract

Importers rarely observe the price of every good in every market because of information frictions. In this paper, we seek to explain how the presence of such frictions shape the flow of goods between countries. To this end, we introduce rationally inattentive importers in a multi-country Ricardian trade model. Under specific assumptions about preferences and technology, we provide an information-theoretical foundation of the gravity equation that links bilateral trade flows with the cost of processing information faced by importers. A distinguishable feature of our model is that importers buy the same good from several countries. In a more general setting, we analyze how small reductions in observable trade costs may have large effects on trade flows as importers endogenously process different amounts of information across countries. We also show that, unlike traditional trade costs, information costs have non-monotonic implications for bilateral trade flows. Finally, we contribute to the rational inattention literature by providing a closed-form solution to a discrete choice problem with asymmetric prior beliefs.

Suggested Citation

  • Kunal Dasgupta & Jordi Mondria, 2014. "Inattentive Importers," Working Papers tecipa-512, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-512
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    Cited by:

    1. Tan, Yong, 2016. "The Impact of Demand Shocks on Firm-Level Offshoring Behavior: Theory and Evidence," MPRA Paper 73734, University Library of Munich, Germany.
    2. Thomas Chaney, 2013. "The Gravity Equation in International Trade: An Explanation," NBER Working Papers 19285, National Bureau of Economic Research, Inc.
    3. Hu, Cui & Tan, Yong, 2017. "Learning to Import From Neighbors," MPRA Paper 78108, University Library of Munich, Germany.
    4. Wilson, Chris M., 2016. "Information Matters: A Theoretical Comparison of Some Cross-Border Trade Barriers," EconStor Preprints 130180, ZBW - German National Library of Economics.
    5. Brei, Michael & von Peter, Goetz, 2018. "The distance effect in banking and trade," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 116-137.
    6. Mr�zov�, Monika & Neary, J Peter & Parenti, Mathieu, 2017. "Sales and Markup Dispersion: Theory and Empirics," CEPR Discussion Papers 12044, C.E.P.R. Discussion Papers.
    7. Peter Neary & Monika Mrázová & Mathieu Parenti, 2015. "Technology, Demand, And The Size Distribution Of Firms," Economics Series Working Papers 774, University of Oxford, Department of Economics.
    8. Wilson, Chris M., 2016. "Information matters: A theoretical comparison of some cross-border trade barriers," Information Economics and Policy, Elsevier, vol. 37(C), pages 52-60.
    9. Chris M Wilson, 2015. "Information Matters: Comparing Some Theoretical Determinants of Border Effects in Trade," Discussion Paper Series 2015_02, Department of Economics, Loughborough University, revised Feb 2015.
    10. Tan, Yong & Shao, Yuchen, 2016. "The Impact of Demand Shocks on Firm-Level Offshoring Behavior: Theory and Evidence," MPRA Paper 68728, University Library of Munich, Germany.

    More about this item

    Keywords

    Gravity; Trade; Information; Magnification; Rational Inattention;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F10 - International Economics - - Trade - - - General
    • F15 - International Economics - - Trade - - - Economic Integration

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