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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.

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

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Length: Unknown pages
Date of creation: 30 May 2014
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Handle: RePEc:tor:tecipa:tecipa-512
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  1. Stijn Van Nieuwerburgh & Laura Veldkamp, 2007. "Information Immobility and the Home Bias Puzzle," NBER Working Papers 13366, National Bureau of Economic Research, Inc.
  2. Yulei Luo, 2005. "Consumption Dynamics under Information Processing Constraints," Macroeconomics 0505011, EconWPA, revised 03 Jun 2005.
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  8. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
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  10. Bartosz Mackowiak & Mirko Wiederholt, 2004. "Optimal Sticky Prices under Rational Inattention," SFB 649 Discussion Papers SFB649DP2005-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Jul 2005.
  11. 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.
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  14. 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.
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  20. repec:inr:wpaper:21709 is not listed on IDEAS
  21. Filip Matejka, 2010. "Rationally Inattentive Seller: Sales and Discrete Pricing," 2010 Meeting Papers 420, Society for Economic Dynamics.
  22. 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.
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