Information Globalization, Risk Sharing and International Trade
38 Pages Posted: 3 Aug 2014 Last revised: 11 Feb 2015
Date Written: December 4, 2014
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: Suggested Citation