Information Frictions in Trade

Treb Allen*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

54 Scopus citations

Abstract

It is costly to learn about market conditions elsewhere, especially in developing countries. This paper examines how such information frictions affect trade. Using data on regional agricultural trade in the Philippines, I first document a number of observed patterns in trade flows and prices that suggest the presence of information frictions. I then incorporate information frictions into a perfect competition trade model by embedding a process whereby heterogeneous producers engage in a costly sequential search process to determine where to sell their produce. I show that introducing information frictions reconciles the theory with the observed patterns in the data. Structural estimation of the model finds that information frictions are quantitatively important: roughly half the observed regional price dispersion is due to information frictions. Furthermore, incorporating information frictions improves the out-of-sample predictive power of the model.

Original languageEnglish (US)
Pages (from-to)2041-2083
Number of pages43
JournalEconometrica
Volume82
Issue number6
DOIs
StatePublished - Nov 1 2014

Keywords

  • Agriculture
  • Information
  • Philippines
  • Search
  • Trade
  • Trade costs

ASJC Scopus subject areas

  • Economics and Econometrics

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