Abstract
Information frictions prevent importers from observing the price of a good in every market. In this paper, we seek to explain how the presence of such frictions shapes the flow of goods between countries. To this end, we introduce rationally inattentive importers in a multi-country Ricardian trade model. The amount of information importers process is endogenous and reacts to changes in observable trade costs. Unlike traditional trade costs, changes in information processing costs have non-monotonic and asymmetric effects on bilateral trade flows. The model generates a novel prediction regarding the relationship between information processing costs and concentration of imports that finds support in the data. We calibrate the model, perform counterfactuals and show quantitatively how the response of trade flows to exogenous trade shocks gets magnified under inattention.
Published Version
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