IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Inattentive Importers

  • Kunal Dasgupta
  • Jordi Mondria

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://www.economics.utoronto.ca/public/workingPapers/tecipa-512.pdf
File Function: Main Text
Download Restriction: no

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-512.

as
in new window

Length: Unknown pages
Date of creation: 30 May 2014
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-512
Contact details of provider: Postal:
150 St. George Street, Toronto, Ontario

Phone: (416) 978-5283

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Antonella Tutino, 2012. "Online Appendix to "Rationally inattentive consumption choices"," Technical Appendices 11-143, Review of Economic Dynamics.
  2. Mondria, Jordi, 2010. "Portfolio choice, attention allocation, and price comovement," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1837-1864, September.
  3. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
  4. Maćkowiak, Bartosz & Wiederholt, Mirko, 2009. "Optimal sticky prices under rational inattention," Working Paper Series 1009, European Central Bank.
  5. Keith Head & Thierry Mayer, 2013. "What Separates Us? Sources of Resistance to Globalization," Working Papers 2013-26, CEPII research center.
  6. Richard Portes & Helene Rey, 1999. "The Determinants of Cross-Border Equity Flows," NBER Working Papers 7336, National Bureau of Economic Research, Inc.
  7. Laura Veldkamp & Stijn Van Nieuwerburgh, 2004. "Information Immobility and the Home Bias Puzzle," Working Papers 04-32, New York University, Leonard N. Stern School of Business, Department of Economics.
  8. Alisdair McKay & Filip Matejka, 2011. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," Boston University - Department of Economics - Working Papers Series WP2011-026, Boston University - Department of Economics.
  9. Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May.
  10. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  11. Lin Peng & Wei Xiong, 2005. "Investor Attention: Overconfidence and Category Learning," NBER Working Papers 11400, National Bureau of Economic Research, Inc.
  12. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  13. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  14. Hector Calvo & Gregory Corcos & Emanuel Ornelas & Facundo Albornoz, 2010. "Sequential Exporting," 2010 Meeting Papers 1065, Society for Economic Dynamics.
  15. Anne-Célia Disdier & Keith Head, 2008. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 37-48, February.
  16. Treb Allen, 2014. "Information Frictions in Trade," Econometrica, Econometric Society, vol. 82, pages 2041-2083, November.
  17. Gould, David M, 1994. "Immigrant Links to the Home Country: Empirical Implications for U.S. Bilateral Trade Flows," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 302-16, May.
  18. Morales, Eduardo & Sheu, Gloria & Zahler, Andrés, 2011. "Gravity and extended gravity: estimating a structural model of export entry," MPRA Paper 30311, University Library of Munich, Germany.
  19. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  20. Jon Haveman & David Hummels, 2004. "Alternative hypotheses and the volume of trade: the gravity equation and the extent of specialization," Canadian Journal of Economics, Canadian Economics Association, vol. 37(1), pages 199-218, February.
  21. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
  22. James E. Rauch & Vitor Trindade, 2002. "Ethnic Chinese Networks In International Trade," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 116-130, February.
  23. Samuel S. Kortum & Jonathan Eaton & Costas Arkolakis, 2011. "Staggered Adjustment and Trade Dynamics," 2011 Meeting Papers 1322, Society for Economic Dynamics.
  24. Keith Head & John Ries, 1998. "Immigration and Trade Creation: Econometric Evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 47-62, February.
  25. Cardell, N. Scott, 1997. "Variance Components Structures for the Extreme-Value and Logistic Distributions with Application to Models of Heterogeneity," Econometric Theory, Cambridge University Press, vol. 13(02), pages 185-213, April.
  26. Rubinstein, Yona & Helpman, Elhanan & Melitz, Marc, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," Scholarly Articles 3228230, Harvard University Department of Economics.
  27. Luo Yulei & Young Eric R, 2009. "Rational Inattention and Aggregate Fluctuations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-43, April.
  28. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  29. 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.
  30. Filip Matejka, 2010. "Rationally Inattentive Seller: Sales and Discrete Pricing," 2010 Meeting Papers 420, Society for Economic Dynamics.
  31. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  32. Stijn Van Nieuwerburgh & Laura Veldkamp, 2010. "Information Acquisition and Under-Diversification," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 779-805.
  33. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 441-487.
  34. David Hummels, 2007. "Transportation Costs and International Trade in the Second Era of Globalization," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 131-154, Summer.
  35. Woodford, Michael, 2009. "Information-constrained state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 56(S), pages S100-S124.
  36. repec:inr:wpaper:21709 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:tor:tecipa:tecipa-512. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RePEc Maintainer)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.