IDEAS home Printed from https://ideas.repec.org/p/zbw/wtowps/ersd201412.html
   My bibliography  Save this paper

Information frictions and the law of one price: "When the States and the Kingdom became United"

Author

Listed:
  • Steinwender, Claudia

Abstract

How do information frictions distort international trade? This paper exploits a unique historical experiment to estimate the magnitude of these distortions: the establishment of the transatlantic telegraph connection in 1866. I use a newly collected data set based on historical newspaper records that provides daily data on information flows across the Atlantic together with detailed, daily information on prices and trade flows of cotton. Information frictions result in large and volatile deviations from the Law of One Price. What is more, the elimination of information frictions has real effects: Exports respond to information about foreign demand shocks. Average trade flows increase after the telegraph and become more volatile, providing a more efficient response to demand shocks. I build a model of international trade that can explain the empirical evidence. In the model, exporters use the latest news about a foreign market to forecast expected selling prices when their exports arrive at the destination. Their forecast error is smaller and less volatile the more recent the available information. I estimate the welfare gains from information transmission through the telegraph to be roughly equivalent to those from abolishing a 6% ad valorem tariff.

Suggested Citation

  • Steinwender, Claudia, 2014. "Information frictions and the law of one price: "When the States and the Kingdom became United"," WTO Staff Working Papers ERSD-2014-12, World Trade Organization (WTO), Economic Research and Statistics Division.
    • Handle: RePEc:zbw:wtowps:ersd201412
    DOI: 10.30875/ff860c9c-en
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/104758/1/797425500.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.30875/ff860c9c-en?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. David L. Hummels & Georg Schaur, 2013. "Time as a Trade Barrier," American Economic Review, American Economic Association, vol. 103(7), pages 2935-2959, December.
    2. Aparajita Goyal, 2010. "Information, Direct Access to Farmers, and Rural Market Performance in Central India," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 22-45, July.
    3. Hummels, David L. & Schaur, Georg, 2010. "Hedging price volatility using fast transport," Journal of International Economics, Elsevier, vol. 82(1), pages 15-25, September.
    4. Albornoz, Facundo & Calvo Pardo, Héctor F. & Corcos, Gregory & Ornelas, Emanuel, 2012. "Sequential exporting," Journal of International Economics, Elsevier, vol. 88(1), pages 17-31.
    5. repec:ucp:bkecon:9780853236061 is not listed on IDEAS
    6. Jenny C. Aker, 2010. "Information from Markets Near and Far: Mobile Phones and Agricultural Markets in Niger," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 46-59, July.
    7. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, September.
    8. Lew, Byron & Cater, Bruce, 2006. "The telegraph, co-ordination of tramp shipping, and growth in world trade, 1870–1910," European Review of Economic History, Cambridge University Press, vol. 10(2), pages 147-173, August.
    9. Treb Allen, 2014. "Information Frictions in Trade," Econometrica, Econometric Society, vol. 82, pages 2041-2083, November.
    10. Irwin, Douglas A., 2003. "The optimal tax on antebellum US cotton exports," Journal of International Economics, Elsevier, vol. 60(2), pages 275-291, August.
    11. Ejrnæs, Mette & Persson, Karl Gunnar, 2010. "The gains from improved market efficiency: trade before and after the transatlantic telegraph," European Review of Economic History, Cambridge University Press, vol. 14(3), pages 361-381, December.
    12. Jeffrey R. Brown & Austan Goolsbee, 2002. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 481-507, June.
    13. Robert Jensen, 2007. "The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 879-924.
    14. Harrigan, James, 2010. "Airplanes and comparative advantage," Journal of International Economics, Elsevier, vol. 82(2), pages 181-194, November.
    15. Carolyn L. Evans & James Harrigan, 2005. "Distance, Time, and Specialization: Lean Retailing in General Equilibrium," American Economic Review, American Economic Association, vol. 95(1), pages 292-313, March.
    16. Pippenger, John & Phillips, Llad, 2008. "Some pitfalls in testing the law of one price in commodity markets," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 915-925, October.
    17. Gregory Clark & Robert C. Feenstra, 2003. "Technology in the Great Divergence," NBER Chapters, in: Globalization in Historical Perspective, pages 277-322, National Bureau of Economic Research, Inc.
    18. David G. Surdam, 1998. "King Cotton: Monarch or Pretender? The State of the Market for Raw Cotton on the Eve of the American Civil War," Economic History Review, Economic History Society, vol. 51(1), pages 113-132, February.
    19. 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.
    20. Andrew Coleman, 2009. "Storage, Slow Transport, and the Law of One Price: Theory with Evidence from Nineteenth-Century U.S. Corn Markets," The Review of Economics and Statistics, MIT Press, vol. 91(2), pages 332-350, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gino Gancia & Giacomo A M Ponzetto & Jaume Ventura, 2022. "Globalization and Political Structure," Journal of the European Economic Association, European Economic Association, vol. 20(3), pages 1276-1310.
    2. Réka Juhász & Claudia Steinwender, 2018. "Spinning the Web: The Impact of ICT on Trade in Intermediates and Technology Diffusion," NBER Working Papers 24590, National Bureau of Economic Research, Inc.
    3. Wolfgang Keller & Carol H. Shiue, 2020. "Market integration and institutional change," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(2), pages 251-285, May.
    4. Gábor Békés & Lionel Fontagné & Balázs Muraközy & Vincent Vicard, 2017. "Shipment frequency of exporters and demand uncertainty," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(4), pages 779-807, November.
    5. Maggie X. Chen & Min Wu, 2021. "The Value of Reputation in Trade: Evidence from Alibaba," The Review of Economics and Statistics, MIT Press, vol. 103(5), pages 857-873, December.
    6. Christopher Parsons & Pierre‐Louis Vézina, 2018. "Migrant Networks and Trade: The Vietnamese Boat People as a Natural Experiment," Economic Journal, Royal Economic Society, vol. 128(612), pages 210-234, July.
    7. Gabor Békés & Lionel Fontagné & Balazs Murakozy & Vincent Vicard, 2015. "Shipment frequency of exporters and demand uncertainty: An inventory management approach," Working Papers hal-01315615, HAL.
    8. Fabio Santeramo, 2015. "A cursory review of the identification strategies," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 3(1), pages 1-8, December.
    9. Clémence Lenoir & Julien Martin & Isabelle Mejean, 2023. "Search Frictions in International Goods Markets," Journal of the European Economic Association, European Economic Association, vol. 21(1), pages 326-366.
    10. repec:spo:wpmain:info:hdl:2441/4j5snkuat19kma9diah5p0g5eq is not listed on IDEAS
    11. Wilson, Chris M., 2016. "Information Matters: A Theoretical Comparison of Some Cross-Border Trade Barriers," EconStor Preprints 130180, ZBW - Leibniz Information Centre for Economics.
    12. Baley, Isaac & Veldkamp, Laura & Waugh, Michael, 2020. "Can global uncertainty promote international trade?," Journal of International Economics, Elsevier, vol. 126(C).
    13. Wolfgang Keller & Carol H. Shiue, 2013. "The Link Between Fundamentals and Proximate Factors in Development," NBER Working Papers 18808, National Bureau of Economic Research, Inc.
    14. Isaac Baley & Laura Veldkamp & Michael Waugh, 2016. "Information globalization," Economics Working Papers 1529, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2019.
    15. Dasgupta, Kunal & Mondria, Jordi, 2018. "Inattentive importers," Journal of International Economics, Elsevier, vol. 112(C), pages 150-165.
    16. Possada, Kian Cássehgari & Ganne, Emmanuelle & Piermartini, Roberta, 2022. "The Role of WTO Committees through the Lens of Specific Trade Concerns Raised in the TBT Committee," World Trade Review, Cambridge University Press, vol. 21(4), pages 411-431, October.
    17. Keller, Wolfgang & Shiue, Carol, 2016. "Market Integration as a Mechanism of Growth," CEPR Discussion Papers 11627, C.E.P.R. Discussion Papers.
    18. Porteous, Obie C., 2015. "High Trade Costs and Their Consequences: An Estimated Model of African Agricultural Storage and Trade," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205776, Agricultural and Applied Economics Association.
    19. Michel Fouquin & Jules Hugot, 2016. "Back to the Future: International Trade Costs and the Two Globalizations," Vniversitas Económica, Universidad Javeriana - Bogotá, vol. 0(0), pages 1-35, August.
    20. repec:hal:spmain:info:hdl:2441/4j5snkuat19kma9diah5p0g5eq is not listed on IDEAS
    21. Kunal Dasgupta & Jordi Mondria, 2015. "Gains from Trade under Quality Uncertainty," Working Papers tecipa-526, University of Toronto, Department of Economics.
    22. Sam Haltenhof, "undated". "Services Trade and Internet Connectivity," Working Papers 668, Research Seminar in International Economics, University of Michigan.
    23. Anais Maillet, 2015. "Food price volatility and farmers' production decisions under imperfect information," FOODSECURE Technical papers 8, LEI Wageningen UR.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James M. Harrison, 2024. "Putting the news in New York and New Orleans: the impact of information frictions on trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 160(4), pages 1167-1202, November.
    2. Gábor Békés & Lionel Fontagné & Balázs Muraközy & Vincent Vicard, 2017. "Shipment frequency of exporters and demand uncertainty," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(4), pages 779-807, November.
    3. Eugenia Go, 2020. "Trade implications of transport cost in the Philippines," Economics PhD Theses 0320, Department of Economics, University of Sussex Business School.
    4. Ardelean, Adina & Lugovskyy, Volodymyr, 2023. "It Pays to be big: Price discrimination in maritime shipping," European Economic Review, Elsevier, vol. 153(C).
    5. Claudia Steinwender, 2018. "Real Effects of Information Frictions: When the States and the Kingdom Became United," American Economic Review, American Economic Association, vol. 108(3), pages 657-696, March.
    6. Jenny C. Aker & Marcel Fafchamps, 2015. "Mobile Phone Coverage and Producer Markets: Evidence from West Africa," The World Bank Economic Review, World Bank, vol. 29(2), pages 262-292.
    7. repec:idb:brikps:7994 is not listed on IDEAS
    8. Gabor Békés & Lionel Fontagné & Balazs Murakozy & Vincent Vicard, 2015. "Shipment frequency of exporters and demand uncertainty: An inventory management approach," Working Papers hal-01315615, HAL.
    9. Christian Volpe Martincus, 2016. "Out of the Border Labyrinth: An Assessment of Trade Facilitation Initiatives in Latin America and the Caribbean," IDB Publications (Books), Inter-American Development Bank, number 96856, February.
    10. Carballo, Jerónimo & Rodriguez Chatruc, Marisol & Salas Santa, Catalina & Volpe Martincus, Christian, 2022. "Online business platforms and international trade," Journal of International Economics, Elsevier, vol. 137(C).
    11. Anais Maillet, 2015. "Food price volatility and farmers' production decisions under imperfect information," FOODSECURE Technical papers 8, LEI Wageningen UR.
    12. Volpe Martincus, Christian & Carballo, Jerónimo & Graziano, Alejandro, 2015. "Customs," Journal of International Economics, Elsevier, vol. 96(1), pages 119-137.
    13. Moussa Keita, 2016. "Does ICT Development Flatten the Globe? Evidence from International Trade Costs Data," American Journal of Trade and Policy, Asian Business Consortium, vol. 3(2), pages 39-46.
    14. Horag Choi & Julio Mancuso & Christis G. Tombazos, 2021. "Trade facilitation in the presence of non‐independent impediments," The World Economy, Wiley Blackwell, vol. 44(9), pages 2604-2637, September.
    15. Bianka Dettmer & Andreas Freytag & Peter Draper, 2013. "Check-in, departure and arrival times: Air cargo in Southern Africa?," Jena Economics Research Papers 2013-018, Friedrich-Schiller-University Jena.
    16. Clément Mazet-Sonilhac, 2021. "In search of frictions [Les frictions informationnelles dans les marchés du crédit et des biens]," SciencePo Working papers tel-03439354, HAL.
    17. Hemang Subramanian & Eric Overby, 2017. "Electronic Commerce, Spatial Arbitrage, and Market Efficiency," Information Systems Research, INFORMS, vol. 28(1), pages 97-116, March.
    18. Volpe Martincus, Christian, 2016. "Out of the Border Labyrinth: An Assessment of Trade Facilitation Initiatives in Latin America and the Caribbean," IDB Publications (Books), Inter-American Development Bank, number 7994.
    19. Renjing Chen, 2024. "Information asymmetry and dynamic sourcing: Evidence from Chinese firms," The World Economy, Wiley Blackwell, vol. 47(2), pages 462-491, February.
    20. Diether W. Beuermann, 2015. "Information and Communications Technology, Agricultural Profitability and Child Labor in Rural Peru," Review of Development Economics, Wiley Blackwell, vol. 19(4), pages 988-1005, November.
    21. Pallavi Rajkhowa & Lukas Kornher, 2023. "Effects of electronic markets on prices, spikes in prices, and price dispersion: A case study of the tea market in India," Agribusiness, John Wiley & Sons, Ltd., vol. 39(4), pages 1117-1138, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:wtowps:ersd201412. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/wtoerch.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.