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Inattentive Importers

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  • Kunal Dasgupta
  • Jordi Mondria

Abstract

Information frictions prevent importers from observing the price of a good in every market. 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. The amount of information importers process about each country is endogenous and reacts to changes in observable trade costs. Unlike traditional trade costs, changes in information processing costs have non-monotonic and asymmetric effects on bilateral trade flows. We go on to show quantitatively how small differences in distance generate large differences in trade flows, thereby shedding light on the distance elasticity puzzle. The model also generates a novel prediction regarding the relationship between information processing costs and the concentration of import distributions that finds support in the data.

Suggested Citation

  • Kunal Dasgupta & Jordi Mondria, 2016. "Inattentive Importers," Working Papers tecipa-566, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-566
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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. 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.
    6. Eric B. Schneider, 2016. "Health, Gender and the Household: Children’s Growth in the Marcella Street Home, Boston, MA, and the Ashford School, London, UK," Research in Economic History,in: Research in Economic History, volume 32, pages 277-361 Emerald Publishing Ltd.
    7. 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.
    8. Raphael Anton Auer & Thomas Chaney & Philip Ulrich Sauré, 2012. "Quality Pricing-to-Market," Working Papers 2012-11, Swiss National Bank.
    9. Paez-Farrell, Juan, 2014. "Resuscitating the ad hoc loss function for monetary policy analysis," Economics Letters, Elsevier, pages 313-317.
    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

    Rational inattention; incomplete information; distance elasticity.;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F10 - International Economics - - Trade - - - General
    • F19 - International Economics - - Trade - - - Other
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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