Information Matters: A Theoretical Comparison of Some Cross-Border Trade Barriers

Abstract

There is widespread evidence that geographical borders reduce trade. This paper presents a theoretical model capable of providing a succinct comparison of three broad forms of trade barriers involving i) trade costs, ii) localized tastes, and iii) information frictions. Despite being traditionally under-researched, it provides the stark finding that information frictions often provide the relatively more powerful marginal effect in reducing cross-border trade, and associated levels of welfare. This result remains robust under a number of extensions that further document the roles of product differentiation and alternative forms of trade costs.

Keywords: Information Frictions, Search Costs, Trade Costs, Localized Tastes, Product Differentiation

JEL Classification: F10, L13, D83