Information Globalization, Risk Sharing and International Trade

38 Pages Posted: 3 Aug 2014 Last revised: 11 Feb 2015

See all articles by Isaac Baley

Isaac Baley

Universitat Pompeu Fabra; Barcelona GSE; Centre for Economic Policy Research (CEPR)

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Michael E. Waugh

New York University (NYU), Leonard N. Stern School of Business, Department of Economics

Date Written: December 4, 2014

Abstract

Information frictions are often invoked to explain low levels of international trade beyond those that measured trade frictions (tariffs, transportation costs, etc.) can explain. But to explain why international trade is lower then domestic trade, home firms have to know something that foreigners do not. Without information asymmetry, domestic trade and foreign trade would be inhibited equally. This paper incorporates a simple information asymmetry in a standard, two-country Armington trade model and studies its effect on international risk sharing and trade flows. We find that ameliorating information asymmetry - information globalization - reduces trade and international risk sharing. In other words, asymmetric information frictions behave in the opposite manner as a standard trade cost.

Keywords: information frictions, international trade, risk sharing

JEL Classification: D8, F4

Suggested Citation

Baley, Isaac and Veldkamp, Laura and Waugh, Michael E., Information Globalization, Risk Sharing and International Trade (December 4, 2014). Available at SSRN: https://ssrn.com/abstract=2475102 or http://dx.doi.org/10.2139/ssrn.2475102

Isaac Baley (Contact Author)

Universitat Pompeu Fabra ( email )

Barcelona
Spain

Barcelona GSE ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Laura Veldkamp

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael E. Waugh

New York University (NYU), Leonard N. Stern School of Business, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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